(As filed with the Securities and Exchange Commission March 14, 2000)
File No. 70-[____]
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CP&L Energy, Inc. Florida Progress Corporation
411 Fayetteville Street Mall One Progress Plaza
Raleigh, North Carolina 27601 St. Petersburg, Florida 33701
(Names of companies filing this statement and addresses of
principal executive offices)
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None
(Name of top registered holding company parent of each applicant or declarant)
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Robert B. McGehee, Esq. Kenneth E. Armstrong, Esq.
Executive Vice President and Vice President and General Counsel
General Counsel Florida Progress Corporation
Carolina Power & Light Company One Progress Plaza
411 Fayetteville Street Mall St. Petersburg, Florida 33701
Raleigh, North Carolina 27601
(Names and addresses of agents for service)
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The Commission is requested to mail copies of all orders, notices and other
communications to:
Frank A. Schiller, Esq. Timothy S. Goettel, Esq.
Director, Legal Department Hunton & Williams
Carolina Power & Light Company 421 Fayetteville Street Mall
411 Fayetteville Street Mall Raleigh, North Carolina 27601
Raleigh, North Carolina 27601
William T. Baker, Jr., Esq. Joanne C. Rutkowski, Esq.
Thelen Reid & Priest LLP LeBoeuf, Lamb, Greene &
40 W. 57th Street, 25th Floor MacRae, L.L.P.
New York, New York 10019 1875 Connecticut Avenue, N.W.
Washington, D.C. 20009
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TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.................................1
A. INTRODUCTION........................................................1
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B. OTHER REGULATORY FILINGS............................................2
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C. OVERVIEW OF THE TRANSACTION.........................................3
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D. DESCRIPTION OF PARTIES TO THE SHARE EXCHANGE........................4
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1. CP&L Energy and its Subsidiaries................................4
2. Florida Progress and its Subsidiaries...........................7
E. DESCRIPTION OF THE SHARE EXCHANGE..................................10
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F. OPERATIONS OF THE COMBINED COMPANY.................................12
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G. APPROVAL OF CP&L SERVICES AS A SERVICE COMPANY.....................13
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H. OTHER EXISTING AFFILIATE SERVICE AGREEMENTS........................14
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I. EXEMPTION OF FLORIDA PROGRESS AS A HOLDING COMPANY.................15
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ITEM 2. FEES, COMMISSIONS AND EXPENSES.....................................15
ITEM 3. APPLICABLE STATUTORY PROVISIONS....................................16
A. SHARE EXCHANGE ANALYSIS - OVERVIEW.................................17
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B. SECTION 10(B)......................................................18
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1. Section 10(b)(1)...............................................18
2. Section 10(b)(2)...............................................22
3. Section 10(b)(3)...............................................24
C. SECTION 10(C)......................................................26
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1. Section 10(c)(1)...............................................27
(a) The Share Exchange will be lawful under Section 8..........27
(b) The Share Exchange will not be detrimental to carrying
out the provisions of Section 11...........................27
(i) Integration of Electric Operations.....................28
(a) Interconnection....................................29
(b) Coordination.......................................33
(c) Single Area or Region..............................36
(d) Size...............................................38
(ii) Retention of NCNG's Gas System........................39
(a) Loss of Economies..................................40
(b) Same State or Adjoining States.....................42
(c) Size...............................................42
(iii)Retention of Other Businesses.........................43
2. Section 10(c)(2)...............................................45
D. SECTION 10(F)......................................................47
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E. INTRA-SYSTEM TRANSACTIONS..........................................47
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1. CP&L Services..................................................47
2. Services, Goods, and Assets Involving the Utility Operating
Companies......................................................49
3. Electric Fuels ................................................49
ITEM 4. REGULATORY APPROVAL................................................49
A. REQUIRED APPROVALS FOR SHARE EXCHANGE..............................49
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1. Antitrust......................................................49
2. State Approvals................................................50
3. Federal Power Act..............................................50
4. Atomic Energy Act..............................................51
5. Federal Communications Commission..............................51
B. REQUIRED APPROVALS FOR AFFILIATE TRANSACTIONS......................51
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1. The North Carolina Utilities Commission........................52
2. South Carolina Public Service Commission.......................52
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3. Florida Public Service Commission..............................53
ITEM 5. PROCEDURE..........................................................53
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS..................................54
A. EXHIBITS...........................................................54
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B. FINANCIAL STATEMENTS...............................................58
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS............................60
ANNEX A DESCRIPTION OF GENERATING ASSETS OF CP&L
ANNEX B DESCRIPTION OF GENERATING ASSETS OF FLORIDA POWER
ANNEX C NON-UTILITY SUBSIDIARIES AND INVESTMENTS OF CP&L
ANNEX D NON-UTILITY SUBSIDIARIES AND INVESTMENTS OF FLORIDA PROGRESS
2
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
A. Introduction.
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CP&L Energy, Inc. ("CP&L Energy"), a North Carolina corporation which
is currently Ia wholly owned subsidiary of Carolina Power & Light Company
("CP&L"), an electric utility company, and Florida Progress Corporation
("Florida Progress"), an exempt holding company which owns all of the issued and
outstanding common stock of Florida Power Corporation ("Florida Power") (jointly
referred to as the "Applicants"), request authorization from the Securities and
Exchange Commission ("Commission") for a proposed business combination between
the two companies and for certain other related transactions. In the proposed
business combination, upon receipt of all necessary approvals, Florida Progress
will become a wholly owned subsidiary of CP&L Energy. Following the consummation
of the proposed transaction, CP&L Energy will register with the Commission as a
holding company pursuant to Section 5 of the Public Utility Holding Company Act
of 1935, as amended (the "Act").1
The combination of CP&L Energy and Florida Progress will result in a
larger and more competitive regional energy supplier. A key motivating factor
for the proposed transaction is the vision shared by the senior managements of
CP&L and Florida Progress concerning the actions needed to respond effectively
to the changes that are occurring in the utility industry. The proposed
transaction is expected to produce substantial benefits to the public, consumers
and investors and will meet all applicable standards of the Act. Among other
things, the Applicants believe that the business combination offers significant
strategic and financial benefits to each company and to their respective
shareholders, employees, customers and the communities in which they do
business. These benefits include, among others:
(i) increased scope, providing an infrastructure capable of
supporting more efficient utility operations, non-utility
business activities and corporate services;
(ii) increased fuel diversification and operating efficiencies,
thereby improving the Applicants' ability to meet the challenges
of the increasingly competitive environment in the utility
industry;
(iii) integration of corporate and administrative functions and
programs, including centralized management and coordination and
operation of utility systems;
(iv) reduced operating costs from the coordinated dispatch and
operation of the combined generating assets of the Applicants;
(v) increased market capitalization, thereby improving access to
capital markets;
(vi) increased geographic diversity of service territories, reducing
exposure to local changes in economic, competitive and climatic
conditions, enabling the resulting combined entity to withstand
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1 Prior to completion of the proposed business combination, CP&L Energy
expects to file one or more additional applications-declarations under the Act
with respect to ongoing activities (including financing activities) and other
matters pertaining to CP&L Energy and its subsidiaries after CP&L Energy becomes
a registered holding company.
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risk and volatility better than either CP&L or Florida Progress
on a stand-alone basis;
(vii) greater purchasing power for items such as fuel and
transportation services, and streamlining of inventories;
(viii) expanded management resources and ability to select leadership
from a larger and more diverse management pool; and
(ix) the ability to play a strong role in the economic development
efforts of the communities that the Applicants now serve.
In summary, the Applicants believe the proposed transaction will
significantly improve their competitive positions and create an enhanced
platform for growth of all segments of their businesses. The Applicants estimate
that efficiencies created by the proposed business combination will generate
total savings (net of costs to achieve) of approximately $1 billion over ten
years. The expected benefits are discussed in further detail in Item 3.C.2.
below.
The proposed transaction has been approved by the boards of directors
of CP&L, Florida Progress and CP&L Energy. In addition, the shareholders of
Florida Progress and CP&L Energy will be asked to approve the proposed
transaction. CP&L Energy will file a Registration Statement on Form S-4 pursuant
to the Securities Act of 1933, which will include the definitive proxy
statement/prospectus to be used in connection with its shareholder meeting. See
EXHIBIT C-1. CP&L Energy and Florida Progress have filed a joint preliminary
proxy statement on Schedule 14A (the "Joint Preliminary Proxy"). See EXHIBIT
C-2.
B. Other Regulatory Filings
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Various aspects of the proposed transaction have been or will be
submitted for review and/or approval by: (i) the Federal Energy Regulatory
Commission (the "FERC"); (ii) the North Carolina Utilities Commission ("NCUC");
(iii) the Nuclear Regulatory Commission (the "NRC"); and (iv) the Federal
Communications Commission (the "FCC"). Moreover, the combination cannot proceed
until CP&L and Florida Progress submit the required information to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and the
specified waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), has expired or been terminated. In addition
to the Commission's approval under the Act, the foregoing approvals are the only
governmental approvals required for the proposed business combination.2 While
there are no formal approvals for this transaction required from either the
Florida Public Service Commission ("FPSC") or the South Carolina Public Service
Commission ("SCPSC"), the companies have been meeting with those state
regulators regarding their ongoing jurisdiction over Florida Power and CP&L.
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2 Although Florida Progress intends to dispose of its interest in
Mid-Continent Life Insurance Company ("Mid-Continent"), an insurance subsidiary,
should it not do so prior to closing of the Share Exchange, approvals from
insurance regulators in Oklahoma and Texas would be required for the indirect
change of control of Mid-Continent that would result from the transaction.
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It is expected that the proposed transaction will be consummated as
soon as practicable after all regulatory approvals are obtained. In order to
permit timely consummation of the transaction and the realization of the
substantial benefits it is expected to produce, the Applicants request that the
Commission's review of this Application-Declaration commence and proceed as
expeditiously as practicable.
C. Overview of the Transaction
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On August 22, 1999, CP&L, CP&L Energy (then named "CP&L Holdings,
Inc.") and Florida Progress entered into an Agreement and Plan of Exchange,
which was amended and restated on March 3, 2000 (as so amended and restated, the
"Exchange Agreement"). The Exchange Agreement provides for CP&L Energy to
acquire all of the issued and outstanding common stock of Florida Progress in
exchange for a combination of shares of CP&L Energy common stock and cash (the
"Share Exchange"). Under the terms of the Exchange Agreement, Florida Progress
shareholders may elect to receive $54.00 in cash for each outstanding share of
Florida Progress common stock or a number of shares of CP&L Energy common stock
equal to the exchange ratio (as described below), subject to proration in the
event that Florida Progress shareholders elect to receive more than 65% of the
total consideration for the exchange in cash or more than 35% in CP&L Energy
common stock.
The Exchange Agreement also provides that Florida Progress
shareholders will be entitled to receive one contingent value obligation ("CVO")
for each share of Florida Progress common stock that they hold. Each CVO will
represent the assignable and transferable right to receive a pro rata portion of
certain contingent payments that are based upon the net after-tax cash flow to
CP&L Energy generated by four synthetic fuels plants (referred to as the
"EARTHCO" plants) that were purchased by Florida Progress in October 1999,
subsequent to the date of the original Agreement and Plan of Exchange.3 The CVOs
are intended to provide Florida Progress shareholders with the potential for
receiving additional cash consideration in the Share Exchange linked
specifically to the future performance of the EARTHCO plants.
As a result of the Share Exchange, Florida Progress will become a
direct wholly owned subsidiary of CP&L Energy. A copy of the Exchange Agreement
is filed herewith as EXHIBIT B-1 and a copy of the Contingent Value Obligation
Agreement is filed herewith as EXHIBIT B-7.
Upon completion of the Share Exchange, CP&L Energy will directly or
indirectly own all of the common stock of three public utility subsidiary
companies: CP&L, a North Carolina corporation; North Carolina Natural Gas
Corporation ("NCNG"), a Delaware corporation which is currently a wholly owned
subsidiary of CP&L; and Florida Power, a Florida corporation. In addition, CP&L
Energy will continue to own, directly or indirectly, all of the existing
non-utility subsidiaries of CP&L and NCNG and will, as a result of the Share
Exchange, indirectly acquire the non-utility subsidiaries of Florida Progress.
See EXHIBIT E-5 for the corporate structure of CP&L Energy following the Share
Exchange.
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3 These four plants currently produce and sell to unrelated persons a
"qualified fuel" that Florida Progress believes qualifies for a credit against
the federal income tax liability of Florida Progress as provided in Section 29
of the Internal Revenue Code of 1986, as amended.
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D. Description of Parties to the Share Exchange.
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1. CP&L Energy and its Subsidiaries
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As indicated, CP&L Energy is currently a direct, wholly owned
subsidiary of CP&L with nominal capitalization. CP&L Energy owns no utility
assets and is not currently a "public utility company" or a "holding company"
for purposes of the Act. In a separate proceeding (File No. 70-9559)4, CP&L is
seeking Commission approval for a reorganization whereby CP&L will become a
direct, wholly owned subsidiary of CP&L Energy, and the current common
shareholders of CP&L will become the shareholders of CP&L Energy. The
reorganization of CP&L has already been approved by CP&L's shareholders and will
be consummated following receipt of required regulatory approvals. The
reorganization of CP&L into a holding company structure is not contingent upon
completion of the Share Exchange transaction that is proposed herein.
CP&L is a regulated public utility incorporated under the laws of the
State of North Carolina. It is primarily engaged in the business of generating,
purchasing, transmitting and distributing electricity in a 30,000 square-mile
area of North Carolina and South Carolina that includes a substantial portion of
the coastal plain of North Carolina extending to the Atlantic Ocean between the
Pamlico River and the South Carolina border, the lower Piedmont section of North
Carolina, and an area of northeastern South Carolina. The principal load centers
within this region include the cities of Raleigh and Wilmington, North Carolina.
CP&L also serves a non-contiguous area in western North Carolina in and around
the City of Asheville. The estimated total population of the area served is
approximately 3.9 million.
CP&L provides retail electric service in more than 200 communities and
wholesale electric service to the North Carolina Eastern Municipal Power Agency
("NCEMPA"), which consists of 32 members, three municipalities, the French Broad
Electric Membership Corporation and the North Carolina Electric Membership
Corporation ("NCEMC"), which consists of 27 members (17 of which are served by
CP&L's system). At December 31, 1999, CP&L was furnishing electric service to
approximately 1.2 million customers.
As of December 31, 1999, CP&L owned or controlled 10,128 MW of
installed generating capability (including the NCEMPA's share of certain
jointly-owned plants that are operated by CP&L), 5,585 pole miles of
transmission lines, including 292 miles of 500 kV lines and 2,857 miles of 230
kV lines, and over 44,294 pole miles of overhead distribution lines and nearly
13,842 miles of underground distribution lines. CP&L is subject to regulation by
the NCUC and the SCPSC with respect to retail electric rates, securities
issuances, affiliate transactions, and other matters, and by FERC with respect
to wholesale electric and electric transmission rates. A complete list and
description of CP&L's generating facilities is contained in Annex A hereto.
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4 See CP&L Holdings, Inc, Holding Co. Act Release No. 27108 (December
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3, 1999) (notice of filing of application). CP&L Energy (formerly CP&L Holdings,
Inc.) intends to claim an exemption as a holding company pursuant to Section
3(a)(1) of the Act and Rule 2 thereunder following consummation of the
reorganization of CP&L into a holding company structure.
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CP&L is one of the 38 regular members of the Southeastern Electric
Reliability Council ("SERC"), a regional electric reliability and planning
organization whose members cover an area of about 464,000 square miles in 13
southeastern and southcentral states, including North Carolina, South Carolina,
Georgia and a portion of the Florida Panhandle. The Virginia-Carolinas Subregion
of SERC ("VACAR") is principally made up of CP&L, Duke Power Company ("Duke
Power"), South Carolina Electric & Gas Company ("SCE&G"), Virginia Electric and
Power Company ("Virginia Power"), and the South Carolina Public Service
Authority (referred to as "Santee Cooper").
CP&L's electric system in and around the city of Asheville in western
North Carolina is separated from CP&L's larger eastern system by a portion of
the Duke Power system, which serves most of central North Carolina. CP&L
operates its eastern and western systems as separate control areas within VACAR.
The two systems are interconnected by the transmission facilities of Duke Power5
and American Electric Power Company, Inc. ("AEP"). CP&L also has interconnection
agreements with the Tennessee Valley Authority ("TVA"), Virginia Power, SCE&G,
and Santee Cooper.
CP&L has entered into interchange agreements with other utilities in
VACAR which provide for the purchase and sale of power for hourly, daily,
weekly, monthly or longer periods. In addition, CP&L is currently purchasing 250
MW of generating capacity and associated energy from AEP's Rockport Unit No. 2
in southern Indiana under an agreement which runs through 2009. The power
purchased under this agreement can be scheduled by CP&L for delivery to either
its eastern or western control areas via existing transmission interconnections
with AEP in both areas. In December 1998, CP&L entered into an agreement to
purchase all of the output of a 500 MW combustion turbine project which is under
construction in Duke Power's service area in South Carolina. The project is
expected to go into service in mid-2001. The purchase agreement has an initial
term of 15 years and provides CP&L with full rights to the output of the
project, as well as control over the scheduling of the units. CP&L has reserved
transmission rights on the Duke Power system which will enable it to schedule
delivery of the output to either its eastern or western control areas.
CP&L is a "holding company" by reason of its ownership of all of the
issued and outstanding common stock of NCNG,6 a gas utility company which CP&L
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5 Historically, peak loads in CP&L's western control area have
exceeded internally available generating capacity. To make up the short-fall,
CP&L for many years reserved up to 275 MW of firm transmission capacity on the
Duke Power system, allowing it to transfer power from its eastern control area
to its western control area. In addition, CP&L had a long-term agreement with
Duke Power providing for the purchase of up to 400 MW of power from Duke Power
for delivery to either the eastern or western control areas. As a result of
recent additions of generating capacity in the western control area, however,
the power purchase agreement with Duke Power was allowed to expire at the end of
its term in June 1999. At the same time, it was determined that the transmission
requirements between CP&L's eastern and western control areas could be met under
Duke Power's open access tariff. Accordingly, CP&L terminated the existing firm
transmission agreement with Duke Power coincident with the expiration of the
long-term power purchase agreement.
6 CP&L claims an exemption from the registration requirements of the
Act pursuant to Section 3(a)(2) and Rule 2 thereunder because it is
predominantly a public utility company whose operations as such are confined to
North Carolina and states contiguous thereto. See Statement on Form U-3A-2 of
CP&L, dated February 29, 2000, in File No. 69-477. Following reorganization of
CP&L into a holding company structure, NCNG will become a direct subsidiary of
CP&L Energy.
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acquired on July 15, 1999.7 NCNG supplies gas or gas transportation service to
approximately 115,000 residential, commercial, agricultural, industrial and
electric utility customers in 110 cities and towns in eastern and south central
North Carolina and to four municipal gas distribution systems which serve an
additional 46,764 end users. NCNG's facilities include approximately 1,128 miles
of transmission pipeline of two to 16 inches in diameter and approximately 2,865
miles of distribution mains. In addition, NCNG provides propane gas service to
more than 11,600 customers and sells, installs, and services gas appliances. The
estimated total population of the territory served by NCNG is 2.6 million.
NCNG purchases gas for its "bundled" retail sales (which account for
approximately half of the total gas throughput on the NCNG system) under a
variety of long-term, short-term and spot market purchase agreements. Gas is
delivered to NCNG on the Transcontinental Gas Pipe Line Corporation ("Transco")
and Columbia Gas Transmission Corporation ("Columbia Gas") interstate pipeline
systems pursuant to long-term contracts.
There is substantial overlap between CP&L's electric service area and
NCNG's gas service area. Approximately 29% of NCNG's retail and wholesale gas
customers are also electric customers of CP&L.8 Like CP&L, NCNG is subject to
regulation by the NCUC with respect to rates, securities issuances, affiliate
transactions, and other matters. Following the reorganization of CP&L into a
holding company structure, it is contemplated that NCNG will become a direct
subsidiary of CP&L Energy.
Although CP&L does not itself engage in any material non-utility
business activities,9 it engages in a variety of non-utility businesses through
subsidiaries. CP&L owns all of the common stock of four direct non-utility
subsidiaries: Monroe Power Company ("Monroe Power"), an "exempt wholesale
generator" within the meaning of Section 32 of the Act10 which owns and operates
a 160 MW simple-cycle combustion turbine unit located in Monroe, Georgia, the
output of which is sold to the Municipal Electric Authority of Georgia ("MEAG")
under a 5-year contract that commenced in December 1999; CaroFund, Inc., which
participates with CaroHome, LLC and other ventures in which CaroHome, LLC has
invested in affordable housing projects for low-income individuals and families
in North and South Carolina; Strategic Resource Solutions Corp. ("SRS"), which
directly and through subsidiaries designs, develops, installs, and provides
facilities and energy management software systems and other services for
educational, commercial, industrial and governmental markets nationwide, and
designs, engineers, installs and maintains building automation systems that
control heating, ventilation, air conditioning and lighting; and Interpath
Communications, Inc. ("Interpath"), a telecommunications company primarily
engaged in providing Internet-based services and marketing fiber optic capacity
to telecommunications carriers.11 Following the reorganization of CP&L into a
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7 See Re: Carolina Power & Light Company, et al., 194 P.U.R. 4th 258
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(July 13, 1999).
8 This percentage is expected to rise as NCNG extends its
distribution system into areas that are already served by CP&L.
9 CP&L derives de minimis revenues from activities such as providing
fleet vehicle repair and servicing, transformer maintenance services, and data
processing services to unaffiliated third parties.
10 See Monroe Power Company, 87 FERCP. 61,238 (May 28, 1999).
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11 It is contemplated that Interpath will be qualified as an "exempt
telecommunications company" pursuant to Section 34 of the Act before the Share
Exchange is consummated.
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holding company structure, it is contemplated that SRS, Monroe Power and
Interpath will become direct subsidiaries of CP&L Energy.
A complete list of CP&L's direct and indirect non-utility subsidiaries
and a description of their businesses is included in Annex C hereto.
For the year ended December 31, 1999, CP&L's consolidated operating
revenues (pro forma to include the results of operations for NCNG in 1999) were
$3.5 billion, of which $3.14 billion (90.6%) were derived from electric utility
operations, $201 million (5.8%) from regulated natural gas operations, and $125
million (3.6%) from diversified non-utility activities. At December 31, 1999,
CP&L had consolidated assets of $9.5 billion, including net utility plant of
$6.8 billion. At October 31, 1999, CP&L had issued and outstanding 159,589,744
shares of common stock, without par value. CP&L's common stock is listed for
trading on the New York and Pacific Stock Exchanges.
More detailed information concerning CP&L and NCNG and their
respective subsidiaries is contained in CP&L's Annual Report on Form 10-K for
the year ended December 31, 1998, and NCNG's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, the Quarterly Reports on Form 10-Q of CP&L
and NCNG for 1999, and CP&L's Current Reports on Form 8-K, filed on August 23,
1999 and August 30, 1999, which are incorporated by reference as EXHIBTS I-1,
I-2, I-4, I-5, I-8, I-9, I-12, I-13, I-18 and I-19.
2. Florida Progress and its Subsidiaries
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Florida Progress, a Florida corporation, is a diversified electric
utility holding company which is exempt from registration pursuant to Section
3(a)(1) of the Act and Rule 2 thereunder.12 Its predominant subsidiary, Florida
Power, is engaged in the generation, purchase, transmission, distribution, and
sale of electricity. Florida Power provides service to approximately 1.4 million
customers in a 20,000 square-mile area of central and northern Florida and along
the west coast of Florida which includes the cities of St. Petersburg and
Clearwater and the rapidly growing areas around Orlando.
As of December 31, 1999, Florida Power's total net winter dependable
generating capacity was 8,267 MW, as produced by: (a) fifteen steam units with a
total capacity of 5,492 MW, consisting of (i) a 91.8% share, representing 782
MW, of one nuclear unit located at Crystal River in Citrus County, Florida; (ii)
twelve fossil steam units with a total capacity of 3,958 MW; and (iii) two
combined cycle units with a total capacity of 752 MW; and (b) 44 combustion
turbine peaking units with a total capacity of 2,775 MW. A list and description
of Florida Power's generating facilities is contained in Annex B hereto. Florida
Power also purchases approximately 1,300 MW of power under a variety of
purchased power agreements. These include (x) long-term contracts for the
purchase of approximately 469 MW from other investor-owned utilities, including
a unit power sales agreement (hereafter referred to as the "Southern UPS
Agreement") under which Florida Power purchases approximately 400 MW of
coal-based capacity from power plants located in Georgia and Alabama that are
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12 Florida Progress claims an exemption pursuant to Section 3(a)(1)
of the Act and Rule 2 thereunder. See Statement on Form U-3A-2 of Florida
Progress, filed February 28, 2000, in File No. 69-267.
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owned by subsidiaries of Southern Company, and (y) contracts for the purchase of
831 MW from "qualifying facilities." Including both the total net winter
dependable generating capacity of 8,267 MW, and the total purchased power of
1,300 MW, at December 31, 1999, Florida Power had a total capacity resource of
9,567 MW.
In addition, as of December 31, 1999, Florida Power owns and maintains
approximately 4,687 circuit miles of high voltage transmission lines, of which
2,645 circuit miles are operated at 500, 230 or 115 kV and the balance are
operated at 69 kV, and 25,409 circuit miles of distribution lines which are
operated at various voltages ranging from 2.4 to 25 kV. Florida Power is subject
to the jurisdiction of the FPSC with respect to retail electric rates, customer
service, planning, construction of facilities, accounting, issuance of
securities, and other matters, and by FERC with respect to wholesale electric
and electric transmission rates, accounting and certain other matters.
Florida Power is a member of the Florida Reliability Coordinating
Council ("FRCC"), which is responsible for ensuring the reliability of the bulk
power electric system in peninsular Florida. Florida Power and seven other
utilities have established the Florida Open Access Sametime Information System
("OASIS"). This is an Internet location where transmission customers may obtain
transmission information and submit requests for service or resell service
rights.
Florida Power, Florida Power & Light Company, Jacksonville Electric
Authority and the City of Tallahassee collectively own 13 transmission lines
that interconnect peninsular Florida with Southern Company. These ties, which
range between 69 kV and 500 kV, have a limited transfer capability relative to
the total load in peninsular Florida. The four utilities operate these lines as
a single interface with Southern Company (the "Southern/Florida Interface") and
have allocated and assigned the total transfer capability over the interface
among themselves pursuant to the Florida-Southern Transmission Interface
Allocation Agreement ("Interface Agreement"), dated May 14, 1990.13 Florida
Power is currently allocated 438 MW of the 3,600 MW total import capability over
the Southern/Florida Interface, most of which it uses in connection with
purchases under the Southern UPS Agreement. The export capability from Florida
on the Southern/Florida Interface is 1,900 MW in the summer and 2,500 MW in the
winter, of which Florida Power is allocated 231 MW and 304 MW, respectively.
Florida Progress has three direct non-utility subsidiaries: Progress
Capital Holdings, Inc. ("Progress Capital"), FPC Del, Inc., and Florida Progress
Funding Corp. ("Progress Funding").
Progress Capital serves as the holding company for substantially all
of Florida Progress's non-utility operations. Its principal subsidiary is
Electric Fuels Corporation ("Electric Fuels"), which is an energy and
transportation company with operations organized into three business units:
energy and related services, inland marine transportation, and rail services.
The energy and related services business unit mines and sells coal to Florida
Power for use at its Crystal River Energy Complex and to other utility and
industrial customers. This business unit also produces and sells natural gas and
synthetic fuel, and provides marine terminal services and offshore marine
transportation. The inland marine transportation business unit, conducted
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13 The Interface Agreement has been approved by FERC. See Florida
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Power & Light Company, et al., 52 FERC P. 61,105 (July 30, 1990).
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through MEMCO Barge Line, Inc., transports coal and dry-bulk cargoes primarily
along the Mississippi, Illinois and Ohio Rivers, using a fleet of river barges
and towboats. The rail services business unit, conducted primarily through
Progress Rail Services Corporation ("Progress Rail"), is one of the largest
integrated processors and suppliers of railroad materials and services in the
country. With operations in 24 states, Mexico and Canada, Progress Rail offers a
full range of railcar parts, maintenance-of-way equipment, rail and other track
material, railcar repair facilities, railcar scrapping and metal recycling, as
well as railcar sales and leasing.
Electric Fuels and its subsidiaries own and/or operate approximately
6,000 railcars, 100 locomotives, 1,200 river barges and 21 river towboats that
are used for the transportation and shipping of coal, steel and other bulk
products. Through joint ventures, Electric Fuels has five oceangoing tug/barge
units, and indirectly owns one-third of a large bulk products terminal located
on the Mississippi River south of New Orleans which handles coal and other
products. A subsidiary of Electric Fuels provides drydocking and repair services
to towboats, offshore supply vessels and barges through its operations near New
Orleans.
Electric Fuels directly and indirectly controls coal reserves located
in eastern Kentucky and southwestern Virginia, and owns and operates both
underground and surface mining facilities, as well as various coal processing
facilities, river and rail transloading facilities and terminals located in
Kentucky, Virginia, Ohio and West Virginia. Electric Fuels owns, in fee,
properties that contain estimated proven and probable coal reserves of
approximately 185 million tons and controls, through mineral leases, additional
proven and probable coal reserves of approximately 30 million tons. Electric
Fuels' total production of coal during 1999 was approximately 3.3 million tons.
Electric Fuels also owns, indirectly through subsidiaries, a minority
interest in one limited liability company and a majority interest in a limited
partnership that produce synthetic fuels which Electric Fuels believes qualify
for Federal income tax credits under Section 29 of the Internal Revenue Code.
Together, these two entities own five plants located in eastern Kentucky and
West Virginia. In October 1999, Electric Fuels purchased four additional
synthetic fuel plants.14 Two of the plants were relocated and began operations
at Electric Fuels' coal mines in Kentucky and Virginia. The other two plants are
expected to be relocated and be operational during 2000 or early 2001.
Electric Fuels supplies substantially all of Florida Power's coal
requirements for its four Crystal River coal-fired units. Most of the coal
delivered by Electric Fuels to Florida Power is purchased from unrelated
producers under several different contracts. Only 15-20% of the coal delivered
by Electric Fuels to Florida Power is sourced from Electric Fuels' captive
mines.
Other subsidiaries of Progress Capital are engaged in the wholesale
telecommunications business and the insurance business. Progress
Telecommunications Corporation sells wholesale fiber optic based capacity in
Florida to long-distance carriers, Internet service providers and other
telecommunications companies, as well as to large industrial, commercial and
- -----------------------------
14 As previously indicated, these four synthetic fuels plants, which
are referred to collectively as the EARTHCO plants, were purchased by
subsidiaries of Electric Fuels subsequent to the date of the original Agreement
and Plan of Exchange and are the assets underlying the CVOs.
9
<PAGE>
governmental entities.15 Progress Capital also holds all of the outstanding
voting securities of Mid-Continent Life Insurance Company ("Mid-Continent"), a
life insurance company that was placed in receivership in the spring of 1997
based on assertions that its policy reserves were understated. Florida Progress
has recorded a provision for a loss on its investment in Mid-Continent, and is
pursuing efforts to divest Mid-Continent.
For the year ended December 31, 1999, Progress Capital had
consolidated operating revenues (before inter-company eliminations) of $1.5
billion and income from operations of $125.2 million, of which approximately 95%
and 60%, respectively, were attributable to Electric Fuels' operations.
FPC Del, Inc. was formed to hold certain accounts receivable for
Florida Power and Progress Rail. Progress Funding was organized in early 1999 to
facilitate a trust preferred stock financing transaction. A complete list of
Florida Progress's direct and indirect non-utility subsidiaries and a
description of their businesses is included in Annex D hereto.
For the year ended December 31, 1999, Florida Progress reported
consolidated operating revenues of $3.85 billion, of which nearly $2.63 billion
(68%) were derived from electric utility operations and $1.21 billion (32%) were
derived from non-utility activities. As of September 30, 1999, Florida Progress
had total assets of $6.4 billion, including net utility plant of $3.6 billion.
At September 30, 1999, Florida Progress had issued and outstanding 98,453,025
shares of common stock, without par value. These shares are traded on the New
York and Pacific Stock Exchanges.
Additional information concerning Florida Progress and Florida Power
and their operations is contained in the combined Annual Report of Florida
Progress and Florida Power on Form 10-K for the year ended December 31, 1998,
the Quarterly Reports of Florida Progress and Florida Power on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 1999, and the Current
Reports on Form 8-K of Florida Progress, dated August 22, 1999 and August 23,
1999, which are incorporated by reference as EXHIBITS I-3, I-6, I-7, I-10, I-11,
I-14, I-15, I-16, and I-17.
E. Description of the Share Exchange
---------------------------------
The Exchange Agreement provides that, upon the effective time of the
Share Exchange, each share of Florida Progress common stock will be
automatically exchanged for the right to receive $54.00 in cash, CP&L Energy
common stock, or a combination of cash and CP&L Energy common stock. as
described below. Completion of the Share Exchange will not occur until certain
approvals, including shareholder approvals, have been obtained and certain other
conditions described in the Exchange Agreement are satisfied or waived. These
are discussed more fully in parts A and B, above. The Share Exchange will become
effective upon the filing of articles of share exchange with the Secretary of
State of the State of North Carolina and the Department of State of the State of
Florida, or at a later date as provided in the articles of share exchange, in
- -----------------------------
15 It is contemplated that Progress Telecommunications Corporation
will be qualified as an "exempt telecommunications company" pursuant to Section
34 of the Act before the Share Exchange is consummated.
10
<PAGE>
accordance with the relevant provisions of North Carolina and Florida law,
respectively.
In the Share Exchange, each share of Florida Progress common stock
issued and outstanding at the effective time of the Share Exchange will
automatically be exchanged for the right to receive the exchange consideration
to be paid by CP&L Energy. Florida Progress shareholders may elect to receive in
exchange for each share of Florida Progress common stock that is held either of:
o $54.00 in cash; or
o a number of shares of CP&L Energy common stock equal to the
exchange ratio, which is designed to provide Florida Progress
shareholders with CP&L Energy common stock having a market value
of $54.00, subject to the limitations described below.
The exchange ratio will be determined by dividing $54.00 by the
average of the closing sale price per share of CP&L Energy common stock as
reported on the New York Stock Exchange Composite Tape on each of the twenty
consecutive trading days ending with the fifth trading day immediately preceding
the closing date (the "Average Closing Price"). However, if the Average Closing
Price is greater than $45.39, the exchange ratio will be fixed at 1.1897, and if
the Average Closing Price is less than $37.13, the exchange ratio will be fixed
at 1.4543. The actual value of stock consideration received for each Florida
Progress share will depend on the market value of CP&L Energy common stock at
the completion of the Share Exchange. Therefore, if the Average Closing Price is
less than $37.13, then each share of Florida Progress common stock exchanged for
stock consideration will be valued in the Share Exchange at less than $54.00,
and if the Average Closing Price is more than $45.39, then each share of Florida
Progress common stock exchanged for stock consideration will be valued in the
Share Exchange at more than $54.00. The exchange ratio was arrived at through
arms-length negotiations between CP&L and Florida Progress. The exchange ratio
and the actual number of shares of CP&L Energy common stock Florida Progress
shareholders will receive will not be determined until after Florida Progress
shareholders vote on the Share Exchange.
After Florida Progress shareholder elections have been tabulated, the
election amounts of cash and CP&L Energy common stock will be subject to
allocation and proration to achieve a mix of the aggregate exchange
consideration that is 65% cash and 35% CP&L Energy common stock. As a result,
Florida Progress shareholders may receive a different combination of cash and
CP&L Energy common stock than they elect.
Depending on the exchange ratio, the Share Exchange will result in
Florida Progress shareholders holding between 20% and 24% of all outstanding
shares of CP&L Energy common stock following consummation of the Share Exchange,
giving effect to the shares to be issued in the Share Exchange and based on the
number of shares of Florida Progress and CP&L Energy common stock outstanding
shortly before the date of the Joint Preliminary Proxy.
A table illustrating the exchange ratio and the number of shares of
CP&L Energy common stock and cash consideration that will be exchanged for each
100 shares of Florida Progress common stock, based on various Average Closing
11
<PAGE>
Prices for CP&L Energy common stock, is set forth on page 7 of the Joint
Preliminary Proxy.
One condition to the obligation of Florida Progress to complete the
Share Exchange is that the Average Closing Price not be less than $30.00, which
is 25.7% lower than the 20-day average closing price of CP&L common stock
immediately before the execution of the original Agreement and Plan of Share
Exchange on August 22, 1999. If the Average Closing Price is below the $30.00
threshold (subject to adjustments for any stock splits), Florida Progress would
have a "walk-away" right.
The Share Exchange is not designed to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended. Accordingly, the exchange of Florida Progress stock will be a taxable
sale of stock for income tax purposes.
As previously indicated, in addition to the consideration described
above, shareholders of Florida Progress will receive one CVO for each share of
Florida Progress common stock that they hold. In the aggregate, the holders of
the CVOs will be entitled to 50% of the net after-tax cash flow generated by the
four EARTHCO plants in excess of $80 million for each of the years 2001 through
2007. Payments will be made with respect to tax years beyond 2007 only if CP&L
Energy is unable to use all of the tax credits generated before 2008 and
therefore carries over and uses some of the tax credits in subsequent years.
Moreover, if in any year from 2001 through 2007 CP&L Energy does not fully
realize the $80 million preference amount, the amount below $80 million for such
year would be carried over to years 2008 and thereafter. Before any such payment
is made to holders of CVOs, the tax credit carry-forward will be applied to
satisfy any remaining preference for the year in which the tax credit was
generated. The holders of CVOs also may be entitled to a portion of the proceeds
if CP&L Energy sells any of the EARTHCO plants.
The Exchange Agreement also provides that the combined company's
corporate headquarters will be located in Raleigh, North Carolina. CP&L Energy
may also maintain a regional headquarters for the operations of Florida Power in
St. Petersburg, Florida. Upon consummation of the Share Exchange, CP&L Energy
will have a 14-member board, to which Florida Progress may appoint 4 directors,
subject to approval by CP&L Energy. The CP&L Energy bylaws provide that the
board shall be divided into three classes, each as nearly as possible equal in
number to the others, with the classes being elected for staggered 3-year terms.
It is expected that certain of the senior executive officers of CP&L and Florida
Progress will become the senior executive officers of CP&L Energy following the
Share Exchange.
Initially, CP&L Energy will finance the cash portion of the Share
Exchange consideration, which is estimated not to exceed $3.5 billion, through
unsecured bank borrowings or unsecured borrowings from other institutional
lenders having maturities of up to 3 years.
F. Operations of the Combined Company
----------------------------------
As explained more fully in Item 3 below, the electric utility
properties of CP&L and Florida Power will constitute an integrated electric
utility system within the meaning of Section 2(a)(29)(A) of the Act. The
facilities of the two companies will be interconnected via a 50 MW firm
12
<PAGE>
transmission path (the "Contract Path") over Southern Company and Duke Power
transmission systems which will extend from the Southern /Florida Interface to
the Duke Power/CP&L eastern control area interface. The Contract Path will be
reserved for an initial one-year period and will be subject to the right to
extend for additional one-year periods. CP&L and Florida Power will enter into a
System Integration Agreement ("Integration Agreement") pursuant to which they
will jointly plan all future generation facilities, coordinate the dispatch of
their respective power plants, and centralize fuel supply and plant maintenance
programs, among other things. See EXHIBIT B-6. Other corporate support functions
of the two companies will be centralized in CP&L Services, a subsidiary service
company to be organized by CP&L Energy prior to the closing of the Share
Exchange.
The gas distribution properties of NCNG constitute an integrated gas
utility system, as defined in Section 2(a)(29)(B) of the Act. As more fully
explained in Item 3, below, the standards for retention of NCNG by CP&L Energy
as an additional public utility system, which are set forth in clauses A-C of
Section 11(b)(1), will be met.
The combination of the complementary expertise and infrastructure of
CP&L and Florida Progress will create a major regional utility in the
southeastern United States, one of the highest customer growth areas in the
country. The combined company will have a broader customer base and more diverse
portfolio of generating assets, and will have the size and scope to be an
effective participant in the emerging and increasingly competitive electric and
natural gas utility markets. Based on the 1998 results for Florida Progress and
CP&L, the pro forma combined revenues for the two companies is approximately
$6.8 billion. The combined company will serve approximately 2.5 million
electricity customers in a 50,000-square-mile retail service area and have about
18,500 MW of generating capacity.
G. Approval of CP&L Services as a Service Company.
----------------------------------------------
Following consummation of the reorganization of CP&L into a holding
company structure, as proposed in File No. 70-9559, CP&L Energy intends to
organize and acquire the voting securities of CP&L Services, which will provide
CP&L, NCNG and other companies in the CP&L Energy system, and, after the Share
Exchange, Florida Power and other companies in the Florida Progress system, with
various administrative, management and corporate support services. CP&L Services
will enter into Service Agreements with each of its associate public-utility
companies and each of its associate non-utility companies. The forms of the
Utility and Non-Utility Service Agreements are filed as EXHIBITS B-2 and B-3
hereto. CP&L Energy requests that the Commission find, pursuant to Rule 88(b),
that CP&L Services' organization and the conduct of its business meet the
requirements of Section 13(b) of the Act with respect to providing reasonable
assurance of efficient and economical performance of services for the benefit of
its associate companies, at cost, fairly and equitably allocated among them.
CP&L Services will be staffed by employees of CP&L and Florida
Progress and their respective subsidiaries who will be transferred over time to
CP&L Services. The Service Agreements provide that CP&L Services may provide its
associate companies with certain administrative and corporate support services,
such as strategic planning, treasury, tax, accounting, legal, human resources,
13
<PAGE>
information systems, investor relations and public relations.16 For any service
provided, CP&L Services will be reimbursed for its cost of providing the
service, determined in accordance with Rules 90 and 91. To the extent possible,
CP&L Services will identify and assign all of its direct costs incurred in
providing any service to a client company, including labor overheads (e.g.,
payroll taxes, employee benefits, etc.). Other costs that cannot be identified
to a particular client company, or which benefit all clients, will be allocated
to all client companies in accordance with the methods of allocation included in
Appendix A to the Service Agreement.
As required by Rule 93, CP&L Services will maintain its accounts,
cost-accounting procedures, and other records in accordance with the
requirements of the Uniform System of Accounts for Mutual Service Companies and
Subsidiary Service Companies and shall file an annual report on Form U-13-60 in
accordance with Rule 94.
CP&L, Florida Power and NCNG may also provide services, upon request,
to CP&L Services or to other associate companies utilizing personnel who will
not be transferred to CP&L Services and other resources and capabilities
developed in the conduct of their public utility operations. As appropriate,
CP&L, Florida Power and NCNG will enter into Service Agreements with associate
companies within the CP&L Energy system, the form of which is filed herewith as
EXHIBIT B-4.
H. Other Existing Affiliate Service Agreements.
-------------------------------------------
The Applicants also request approval, to the extent required, to
continue performance under two pre-existing long-term coal supply agreements
between Electric Fuels and Florida Power, and to enter into extensions thereof
on terms consistent with the current agreements. Under an agreement dated
February 1, 1977, as amended, Electric Fuels supplies coal to Units 1 and 2 of
Florida Power's Crystal River generating station, and under an agreement dated
December 12, 1978, as amended, Electric Fuels supplies coal to Units 4 and 5 of
the Crystal River station. As previously indicated, most of the coal delivered
by Electric Fuels to Florida Power is sourced from unaffiliated mines. Under
each contract, the price to Florida Power for delivered coal is equal to the sum
of the costs incurred by Electric Fuels for coal, which includes (a) the cost of
coal procurement, (b) the cost of transportation to the Crystal River station by
rail or water, (c) Electric Fuels' other expenses relating to procurement and
transportation (including quality analysis, laboratory and laboratory-related
expenses, railcar and locomotive expenses, depreciation, amortization, general
and administrative expenses, interest, and a provision for income taxes), and
(d) a return on Electric Fuels' equity investment associated with assets
dedicated to regulated businesses, primarily the railcars and locomotives, at
the rate of return on equity authorized by the FPSC for Florida Power.
The price Electric Fuels charges Florida Power under the two contracts
is based on market rates for coal procurement and for water borne transportation
under a methodology approved by the FPSC. The rail transportation component is
also based on market rates plus a return allowed by the FPSC on equity utilized
in transporting coal to Florida Power. The Applicants believe that the pricing
- -----------------------------
16 Transition teams are still in the process of evaluating whether it
would be economical and efficient for CP&L Services to provide its associate
companies with all of the listed services and whether additional services may
also be provided by CP&L Services.
14
<PAGE>
terms under the two coal supply agreements are permitted by Rules 81, 90(d)(2)
and 92(b), as applicable.
I. Exemption of Florida Progress as a Holding Company.
--------------------------------------------------
Following the Share Exchange, CP&L Energy intends to retain Florida
Progress as a wholly owned subsidiary, and Florida Progress will continue to own
all of the issued and outstanding common stock of Florida Power, Progress
Capital, and its other non-utility subsidiaries. CP&L Energy represents that
Florida Progress will not issue any additional equity securities or debt
securities, other than to CP&L Energy. Florida Progress's sole purpose following
the Share Exchange will be to hold the securities of Florida Power, Progress
Capital, and its other non-utility subsidiaries and to provide credit support
for the indebtedness of certain of those subsidiaries. Florida Progress will not
engage in any business operations of its own.
In its capacity as a holding company, Florida Progress will continue
to be entitled to an exemption pursuant to Section 3(a)(1) of the Act because
both Florida Progress and Florida Power are incorporated in Florida, the state
in which all of Florida Power's operations are conducted. Accordingly, Florida
Progress requests that the Commission issue an order exempting it from the
registration requirements of Section 5 of the Act pursuant to Section 3(a)(1).
Florida Progress acknowledges that such order shall have no effect upon the
status of Florida Progress and its subsidiaries as direct and indirect
subsidiaries of CP&L Energy, a registered holding company, following the Share
Exchange.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
It is currently estimated that the fees, commissions and expenses paid
or incurred, or to be paid or incurred, directly or indirectly, in connection
with the Share Exchange, including the Commission's filing fees under the
Securities Act of 1933 and expenses associated with soliciting proxies, will
total approximately $39.9 million. A detailed breakdown of these fees,
commissions and expenses will be supplied by amendment.
Commission filing fee for Registration Statement on Form S-4................*
Accountants' fees...........................................................*
Legal fees and expenses relating to the Act.................................*
Other legal fees and expenses...............................................*
Shareholder communications and proxy solicitation...........................*
NYSE listing fee............................................................*
Exchanging, printing and engraving of stock certificates....................*
Investment bankers' fees and expenses:
Salomon Smith Barney...................................................*
Merrill Lynch..........................................................*
15
<PAGE>
Consulting fees related to the Share Exchange...............................*
Miscellaneous...............................................................*
TOTAL.......................................................................*
*To be filed by amendment.
ITEM 3 APPLICABLE STATUTORY PROVISIONS
The following sections of the Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed Share
Exchange:
Section of the Act Transactions to which section or
- ------------------ rule may be applicable:
-----------------------------
4, 5 Registration of CP&L Energy as a
holding company following
consummation of the Share Exchange.
6(a), 7 Issuance by CP&L Energy of common
stock and CVOs in exchange for
shares of Florida Progress common
stock.
9(a)(2), 10(a), (b), (c) and (f) Acquisition by CP&L Energy of
common stock of Florida Progress
and Florida Power.
8, 9(c)(3), 11(b) Retention by CP&L Energy of the
retail gas utility operations of
NCNG; retention of other businesses
of CP&L and Florida Progress and
their direct and indirect
subsidiaries.
13(b) Approval of the services to be
provided by CP&L Services to CP&L,
NCNG, and Florida Power in
accordance with the Utility
Service Agreement; approval of
services to be provided by CP&L
Services to the direct and indirect
non-utility subsidiaries of
CP&L Energy in accordance with the
Non-Utility Service Agreement;
approval of other service
agreements between CP&L Energy
system companies; and approval of
continuation and extension of coal
supply agreements between Electric
Fuels and Florida Power.
16
<PAGE>
Rules
- -----
80-92 Affiliate transactions, generally.
Organization of CP&L Services as a
88 service company subsidiary in the
CP&L Energy system.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed to be applicable to the Share Exchange, such sections and
rules should be considered to be set forth in this Item 3.
A. Share Exchange Analysis - Overview
----------------------------------
Section 9(a)(2) of the Act provides that it is unlawful, without
approval of the Commission under Section 10, "for any person . . . to acquire,
directly or indirectly, any security of any public-utility company, if such
person is an affiliate . . . of such company and of any other public-utility or
holding company, or will by virtue of such acquisition become such an
affiliate." Under the definition set forth in Section 2(a)(11), an "affiliate"
of a specified company means "any person that directly or indirectly owns,
controls, or holds with power to vote, 5 per centum or more of the outstanding
voting securities of such specified company," and "any company 5 per centum or
more of whose outstanding voting securities are owned, controlled, or held with
power to vote, directly or indirectly, by such specified company." As a result
of the proposed Share Exchange, CP&L Energy, which (following the reorganization
of CP&L into a holding company structure) will already own all of the common
stock of CP&L and NCNG, will acquire all of the outstanding voting securities of
Florida Progress, the parent company of Florida Power. The Share Exchange
therefore requires prior Commission approval under the standards of Section 10.
In this regard, the relevant standards are set forth in Sections 10(b), 10(c),
and 10(f) of the Act.
As set forth more fully below, the Share Exchange complies with all of
the applicable provisions of Section 10 of the Act and should be approved by the
Commission. Specifically, the Commission should find that:
o the consideration to be paid in the Share Exchange is fair and
reasonable;
o the Share Exchange will not create detrimental interlocking
relations or concentration of control;
o the Share Exchange will not result in an unduly complicated
capital structure for the CP&L Energy system;
o the Share Exchange is in the public interest and the interests of
investors and consumers;
o the Share Exchange is consistent with Section 8 of the Act and
not detrimental to carrying out the provisions of Section 11;
17
<PAGE>
o the Share Exchange will tend toward the economical and efficient
development of an integrated electric utility system; and
o the Share Exchange will comply with all applicable state laws.
B. Section 10(b)
-------------
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a) unless
the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind
or to an extent detrimental to the public interest or the
interests of investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding-company system of the applicant or will be
detrimental to the public interest or the interests of investors
or consumers or the proper functioning of such holding-company
system.
1. Section 10(b)(1)
---------------
The standards of Section 10(b)(1) are satisfied because the proposed
Share Exchange will not "tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to an extent
detrimental to the public interest or the interests of investors or consumers."
By its nature, any merger results in new links between previously unrelated
companies. The Commission has recognized, however, that such interlocking
relationships are permissible in the interest of efficiencies and economies.
Northeast Utilities, 50 S.E.C. 427, 443 (1990) ("Northeast Utilities"), as
- ------------------- ------------------- --
modified, 50 S.E.C. 511 (1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d
- -------- -------------- ----------------------
358 (D.C. Cir. 1992) (finding that interlocking relationships are necessary to
integrate the two merging entities). The links that will be established as a
result of the Share Exchange are not the types of interlocking relationships
targeted by Section 10(b)(1), which was primarily aimed at preventing utility
mergers unrelated to operating synergies.17
The Exchange Agreement provides that the board of directors of CP&L
Energy will consist of fourteen directors, ten of whom will be designated by
CP&L Energy and four of whom will be designated by Florida Progress from the
- -----------------------------
17 See Section 1(b)(4) of the Act (finding that the public interest
---
and interests of consumers and investors are adversely affected "when the growth
and extension of holding companies bears no relation to the economy of
management and operation or the integration and coordination of related
operating properties . . .").
18
<PAGE>
Florida Progress board of directors, subject to the approval of CP&L Energy.18
In addition, various contractual arrangements among the companies in the CP&L
Energy system will be established, including the following:
o Florida Power will enter into the Utility Service Agreement with
CP&L Services. Likewise, Florida Progress's direct and indirect
non-utility subsidiaries will enter into the Non-Utility Service
Agreement with CP&L Services. Through the consolidation of
functions into CP&L Services, the CP&L Energy system will achieve
substantial economies and efficiencies. By entering into these
service agreements, Florida Progress and its direct and indirect
subsidiaries will receive services from CP&L Services and
effectively avail themselves of these economies and efficiencies.
o CP&L and Florida Power will enter into the Integration Agreement,
which will provide for coordination of production-related
activities, including inter-system sales of capacity and energy,
joint planning, and joint maintenance programs. This agreement is
discussed further below.
These arrangements are necessary to integrate Florida Power fully into the CP&L
Energy system and will therefore be in the public interest and the interest of
investors and consumers. Forging such relationships is beneficial to the
protected interests under the Act and, thus, is not prohibited by Section
10(b)(1). Moreover, because substantial benefits will accrue to the public,
investors and consumers from the affiliation of CP&L Energy and Florida
Progress, whatever interlocking relationships may arise from the combination are
not detrimental.
In applying Section 10(b)(1) to a utility acquisition, the Commission
must further determine whether such acquisition will result in "the type of
structures and combinations at which the Act was specifically directed." Vermont
-------
Yankee Nuclear Power Corp., 43 S.E.C. 693, 700 (1968). The CP&L Energy-Florida
- --------------------------
Progress strategic combination will not create a "huge, complex and irrational
system" but, rather, will afford the opportunity to achieve economies of scale
and efficiencies for the benefit of investors and consumers. See American
--- --------
Electric Power Company, Inc., 46 S.E.C. 1299, 1307 (1978) ("AEP"). As explained
- --------------------------- ---
in the Joint Preliminary Proxy of CP&L and Florida Progress (EXHIBIT C-2
hereto), the primary objective of the Share Exchange is to position the
companies to participate in the growing and increasingly competitive energy
markets. The Share Exchange will combine the strengths of the companies,
enabling them to offer customers a broader array of energy products and services
more efficiently and cost-effectively than either could alone, and at the same
time create a larger and more diverse asset and customer base with enhanced
opportunities for operating efficiencies and risk diversification.
While the combination of CP&L Energy and Florida Progress will create
a large electric utility system, it certainly will not be one that exceeds the
economies of scale of current electric generation and transmission technology.
If approved, the CP&L Energy system will serve approximately 2.5 million
- -----------------------------
18 The Applicants acknowledge the requirements of Section 17(c) of
the Act and Rule 70 thereunder with respect to limitations upon directors and
officers of registered holding companies and subsidiary companies thereof having
affiliations with commercial banking institutions and investment bankers and
undertake that, upon completion of the Share Exchange, they will be in
compliance with the applicable provisions thereof.
19
<PAGE>
electric customers, as well as 164,000 gas customers. On a pro forma basis, as
of September 30, 1999, CP&L Energy will have consolidated assets of about $19.0
billion, including net utility plant of approximately $10.3 billion. For the
year ended December 31, 1998, pro forma combined operating revenues totaled
approximately $6.8 billion. The combined companies will own or control about
18,500 MW of generating capacity.
The following table shows the CP&L Holdings system's relative size as
compared to other registered systems in terms of assets, operating revenues and
customers:19
System Total Assets Operating Revenues Electric Customers
($ Millions) ($ Millions) (Thousands)
------------ -------- -----------
Southern 36,192 11,403 3,794
Entergy 22,848 11,495 2,495
AEP 19,483 6,346 3,022
CP&L Energy 19,020 6,812 2,500
GPU 16,288 4,249 2,041
CSW 13,744 5,482 1,752
As the foregoing table indicates, while CP&L Energy will be among the
larger of the registered electric utility holding companies, it will be
substantially smaller than Southern Company and Entergy, both of which compete
with CP&L and Florida Power in the southeastern U.S. power market, and about the
same size as AEP in terms of total assets and operating revenues. Moreover, the
Commission has approved a number of acquisitions involving larger and
similarly-sized operating utilities. See, e.g., Entergy Corporation, 51 S.E.C.
--- ---- -------------------
869 (1993) ("Entergy Corp.") (acquisition of Gulf States Utilities; combined
------------
assets at time of acquisition in excess of $22 billion); TUC Holding Company,
-------------------
Holding Co. Act Release No. 26749 (Aug. 1, 1997) (combination of Texas Utilities
Company and ENSERCH Corporation; combined assets at time of acquisition of $24.0
billion); and Dominion Resources, Inc., Holding Co. Act Release No. 27113 (Dec.
-----------------------
15, 1999) ("Dominion Resources") (acquisition of Consolidated Natural Gas
------------------
Company; combined assets at time of acquisition of $29.0 billion). Furthermore,
at a time of rapid consolidation in the utility industry, the CP&L Energy system
will be substantially smaller than the systems resulting from the proposed
mergers of AEP and Central and South West Corp. (more than $33 billion in
combined total assets at December 31, 1998), Consolidated Edison of New York and
Northeast Utilities (combined total assets of $24.7 billion at December 31,
1998), and Unicom Corp. and PECO Energy Company (combined total assets of $37.8
billion at December 31, 1998).
- -----------------------------
19 Source: U.S. Securities and Exchange Commission, Financial and
Corporate Report, Holding Companies Registered under the Public Utility Holding
Company Act of 1935 as of July 1, 1999 (data provided is as of December 31,
1998).
20
<PAGE>
The Commission has rejected an interpretation of Section 10(b)(1) that
would impose per se limits on the post-merger size of a registered holding
company. Instead, the Commission assesses the size of the resulting system with
reference to the economic efficiencies that can be achieved through the
integration and coordination of utility operations. The Commission in AEP noted
---
that, although the framers of the Act were concerned about "the evils of
bigness, they were also aware that the combination of isolated local utilities
into an integrated system afforded opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations... [and] [t]hey
wished to preserve these opportunities." AEP, 46 S.E.C. at 1309. By virtue of
the Share Exchange, CP&L Energy will be in a position to realize precisely these
types of benefits. Among other things, the Share Exchange is expected to yield
labor cost savings, corporate and administrative and purchasing savings, and
cost of fuel savings. These expected economies and efficiencies from the
combined utility operations are described in greater detail in Item 3. C.2.
below.
Finally, Section 10(b)(1) also requires the Commission to consider
possible anticompetitive effects of a proposed combination. See Municipal
--- ---------
Electric Association of Massachusetts v. SEC, 413 F.2d 1052 (D.C. Cir. 1969). As
- ------------------------------------- ---
the Commission noted in Northeast Utilities, the "antitrust ramifications of an
-------------------
acquisition must be considered in light of the fact that public utilities are
regulated monopolies and that federal and state administrative agencies regulate
the rates charged to customers." Northeast Utilities, 50 S.E.C. at 445 (citing
-------------------
AEP, 46 S.E.C. at 1324 - 25). In this case, CP&L Energy and Florida Progress
- ---
will file Notification and Report Forms with the Department of Justice and the
Federal Trade Commission pursuant to the HSR Act describing the effects of the
Share Exchange on competition in the relevant market and it is a condition to
the consummation of the Share Exchange that the applicable waiting period under
the HSR Act shall have expired or been terminated.
The competitive impact of the Share Exchange on wholesale power
markets will also be considered by FERC. As summarized in the testimony of Dr.
Peter Fox-Penner and Dr. J. Stephen Henderson submitted in support of the FERC
application (filed as Exhibit D-1 hereto), there is no adverse impact on
wholesale competition resulting from the proposed merger. Numerous factors
contribute to this conclusion, including the availability of transmission
capacity to all potential competitors pursuant to FERC's open access
transmission policies, the presence of several large, low-cost electric
generators in the markets in which the Applicants compete (e.g., Southern
Company, Florida Power & Light Company, Duke Power, Entergy Corp. and AEP), and
certain commitments made by the Applicants to ensure that the merger will not
have the potential to increase market concentrations materially. In fact, the
Applicants believe that the merger will have a positive effect on wholesale
competition by introducing a stronger competitor into the Southeast energy
market to compete with the larger wholesale suppliers that already operate in
that market.
The Commission has found, and the courts have agreed, that it may
appropriately rely upon the FERC with respect to such matters. See City of
--- -------
Holyoke v. SEC, supra at 363-64, quoting Wisconsin's Environmental Decade v.
- -------------- ----- ------- -----------------------------------
SEC, 882 F.2d 523, 527 (D.C. Cir. 1989). For these reasons, the proposed
transaction will not "tend toward interlocking relations or the concentration of
control" of public utility companies, of a kind or to the extent detrimental to
the public interest or the interests of investors or customers within the
meaning of Section 10(b)(1).
21
<PAGE>
2. Section 10(b)(2)
---------------
Section 10(b)(2) precludes approval of an acquisition if the
consideration to be paid in connection with the transaction, including all fees,
commissions and other remuneration, is "not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of .. the utility
assets underlying the securities to be acquired." The Commission has found
"persuasive evidence" that the standards of Section 10(b)(2) are satisfied
where, as here, the agreed consideration for an acquisition is the result of
arms-length negotiations between the managements of the companies involved,
supported by opinions of financial advisors. See Entergy Corp., 51 S.E.C. at
--- -------------
879; Southern Company, Holding Co. Act Release No. 24579 (Feb. 12, 1988).
----------------
The agreed price, which represents a 30% premium to Florida Progress's
shareholders (based on the 20-day average closing price ended August 20, 1999 of
Florida Progress's stock), was the product of extensive and vigorous arms-length
negotiations between CP&L and Florida Progress. These negotiations were preceded
by intensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of each of the respective companies. As recognized by the
Commission in Ohio Power Co., 44 S.E.C. 340, 346 (1970), prices arrived at
--------------
through arms-length negotiations are particularly persuasive evidence that
Section 10(b)(2) is satisfied.
Under the Exchange Agreement, Florida Progress shareholders will also
receive CVOs, which will entitle them to receive payments based on the net
after-tax cash flow generated by the EARTHCO plants. In effect, the CVOs will
provide Florida Progress shareholders the opportunity to earn additional cash
consideration that is directly linked to the performance of non-utility assets
that were purchased by Florida Progress subsequent to the date of the original
Agreement and Plan of Share Exchange. As explained in the Joint Preliminary
Proxy, the value of the CVOs to Florida Progress's shareholders cannot be
precisely determined. Payments with respect to the CVOs will depend on and be
subject to several factors, including the actual annual production of the
EARTHCO plants, the level of sales of that production, the qualification of the
synthetic fuels produced for federal income tax credits and the ability of CP&L
Energy to utilize any such tax credits. Based on various assumptions provided by
Florida Progress management, it is estimated that the Florida Progress share of
the annual net after-tax cash flow represented by the CVOs could reach an
average of $30 million over the years in which the rights to these payments can
accrue to the CVO holders.
Nationally-recognized investment bankers for CP&L and Florida Progress
have reviewed extensive information concerning the companies, analyzed the
agreed per share price employing a variety of valuation methodologies, and
opined that the purchase price is fair, from a financial point of view, to the
respective holders of CP&L common stock and Florida Progress common stock as of
the date of the Exchange Agreement. See EXHIBITS G-1 and G-2. The assistance of
independent consultants in fixing the agreed-upon consideration has been
recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. Southern Company, supra.
---------------- -----
Finally, the transaction is subject to approval by the shareholders of
both Florida Progress and CP&L Energy.
22
<PAGE>
Another consideration under Section 10(b)(2) is the overall fees,
commissions and expenses to be incurred in connection with the Share Exchange.
CP&L Energy and Florida Progress believe that these items will be reasonable and
fair in light of the size and complexity of proposed transaction relative to
other utility mergers and acquisitions, and that the anticipated benefits of the
Share Exchange to the public, investors and consumers are consistent with recent
precedents and meet the standards of Section 10(b)(2).
CP&L Energy and Florida Progress together estimate that they will
incur a combined total of approximately $39.9 million in fees, commissions and
expenses in connection with the Share Exchange. (See Item 2 - Fees, Commissions
and Expenses). By contrast, American Electric Power and Central and South West
Corporation have represented that they expect to incur total transaction fees
and regulatory processing fees of approximately $53 million in connection with
their proposed merger. Dominion Resources, Inc. and Consolidated Natural Gas
Company estimated fees and other merger expenses aggregating $55.5 million in
their recent merger; Cincinnati Gas and Electric Company and PSI Resources
incurred $47.12 million in fees in connection with their combination as
subsidiaries of CINergy; Northeast Utilities alone incurred $46.5 million in
fees and expenses in connection with its acquisition of Public Service of New
Hampshire; and Entergy alone incurred $38 million in fees in connection with its
acquisition of Gulf States Utilities -- which amounts all were approved as
reasonable by the Commission. See Dominion Resources, supra); CINergy, Holding
--- ------------------ ----- -------
Co. Act Release No. 26146 (Oct. 21, 1994); Northeast Utilities, Holding Co. Act
-------------------
Release No. 25548 (June 3, 1992); and Entergy Corp., 51 S.E.C. at 881, n. 63.
-------------
The Applicants believe that the estimated fees and expenses in this
matter bear a fair relation to the value of their respective companies and the
benefits to be achieved by the Share Exchange, and further that the fees and
expenses are fair and reasonable in light of the size and complexity of the
Share Exchange. See Northeast Utilities, supra (noting that fees and expenses
--- ------------------- -----
must constitute normal costs and represent a minor part of the overall
acquisition). Sixty-five percent of Florida Progress's common stock will be
exchanged for cash consideration of $54.00 per share. Thirty-five percent of
Florida Progress's common stock will be converted into a number of shares of
CP&L Energy common stock based on the exchange ratio. Based on the average CP&L
closing price per share as reported on the NYSE for the twenty day period ending
on the fifth trading day before the end of the third fiscal quarter of 1999 (the
period for which pro forma financial information is available), which was
$36.278, CP&L would issue approximately 50,113,000 shares of common stock in the
transaction for thirty-five percent of the Florida Progress common stock
outstanding on September 30, 1999. The Share Exchange would be valued at
approximately $5.274 billion, based on these assumptions, and ignoring the value
of the CVOs. The total estimated fees and expenses of approximately $39.9
million represent approximately .76% of the value of the consideration (other
than the CVOs) to be paid. This is consistent with (and in fact generally lower
than) percentages previously approved by the Commission. See, e.g., Entergy
--- ---- -------
Corp., supra (fees and expenses represented approximately 1.7% of the value of
- ----- -----
the consideration paid to the shareholders of Gulf States Utilities); Dominion
--------
Resources, supra (fees and expenses represented approximately .87% of the
- --------- -----
estimated total consideration to be paid to shareholders of Consolidated Natural
Gas Co.).
23
<PAGE>
3. Section 10(b)(3)
----------------
Section 10(b)(3) requires the Commission to determine whether the
Share Exchange will "unduly complicate the capital structure" or be "detrimental
to the public interest or the interest of investors or consumers or the proper
functioning" of the CP&L Energy system.
The capital structure of the CP&L Energy system will be substantially
similar to capital structures approved by the Commission in other orders. See,
---
e.g., Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997);
- ---- ------------------
CINergy Corp; Holding Co. Act Release No. 26934 (Nov. 2, 1998); and Centerior
- ------------ ---------
Energy Corp., 49 S.E.C. 472 (1986). CP&L Energy's capital structure will also be
- ------------
similar to the capital structures of existing registered holding company
systems. See, e.g., American Electric Power, 47 S.E.C. 215 (1980). The
--- ---- -----------------------
shareholders of Florida Progress will receive CP&L Energy common stock and cash.
CP&L Energy will own, directly or indirectly, 100% of the common stock of CP&L,
Florida Power and NCNG. Hence, the transaction will not create any publicly-held
minority stock interest in any public utility company. The existing debt
securities of CP&L, Florida Power and CP&L's and Florida Progress's non-utility
subsidiaries will likewise remain outstanding without change. The only voting
securities of CP&L Energy that will be publicly held after the Share Exchange
will be CP&L Energy common stock.
The continued existence of Florida Progress as a secondary holding
company in the same holding company system is somewhat unusual but, given the
facts and circumstances of the case, will not unduly complicate CP&L Energy's
capital structure. In this regard, the Commission has permitted the continued
existence of a secondary holding company where it appeared that the overall
benefits of an acquisition would outweigh any historical preference for a single
holding company structure . See Dominion Resources, supra. As was true in
--- ------------------ -----
Dominion Resources, the continued existence of Florida Progress will preserve
- ------------------
certain financing and structural benefits that have already been achieved by
Florida Progress. Specifically, the structure will permit Florida Progress to
maintain in place financing arrangements under which debt securities and
preferred securities issued by non-utility subsidiaries of Florida Progress,
primarily to fund investments in unregulated businesses, have been guaranteed by
Florida Progress. The elimination of Florida Progress as a secondary holding
company would necessitate repayment or redemption of these outstanding
securities or the assumption by CP&L Energy of Florida Progress's obligations
under its guarantees. In either case, significant refinancing and other
transactional costs would be involved.
Moreover, the incurrence by CP&L Energy of approximately $3.5 billion
of indebtedness to finance the cash portion of the purchase price will not
result in an unduly complicated capital structure for the resulting CP&L Energy
system. Acquisition financing of the type contemplated by CP&L Energy is
expressly permitted by Section 7(c)(2)(A) of the Act. As will be addressed in
detail in a separate application, CP&L Energy intends to refinance the
acquisition debt following the Share Exchange through the issuance of longer
term securities and/or using proceeds from the possible sale of some assets. The
Commission has previously authorized registered holding companies to issue debt
to finance an acquisition under similar circumstances. See Dominion Resources,
--- ------------------
supra; and SCANA Corporation, Holding Co. Act Release No. 27133 (Feb. 9, 2000).
- ----- -----------------
24
<PAGE>
Finally, the issuance of the CVOs by CP&L Energy will not represent a
permanent part of CP&L Energy's capitalization. Although these securities will
remain outstanding for a period of years, they will be reflected in CP&L
Energy's financial statements as a contractual commitment to make cash payments
depending upon various factors relating to the EARTHCO plants. Moreover, the
CVOs achieve the desired effect of allocating a portion of the potential upside
from the future performance of the EARTHCO plants to those investors who were
most directly placed at risk when the investment in the EARTHCO plants was made,
namely, the Florida Progress common stockholders.
Set forth below are summaries of the capital structures of CP&L and
Florida Progress as of September 30, 1999, and the pro forma consolidated
capital structure of CP&L Energy (assuming the Share Exchange had been
consummated on September 30, 1999):
CP&L and Florida Progress Historical Consolidated Capital Structures
(dollars in millions)
CP&L Florida Progress
---- ----------------
Common stock equity $3,410.6 52.3% $2,029.3 43.2%
Preferred securities */ 59.4 0.9 333.5 7.1
-
Long-term debt, incl. 2,950.1 45.2 2,330.3 49.7
current portion
Short-term debt 100.0 1.6 --- 0.0
----- ----- --- -----
Total $6,520.1 100.0% $4,693.1 100.0%
CP&L Energy Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common stock equity $5,227.6 36.2%
Preferred securities */ 392.9 2.7
-
Long-term debt, incl. 8,736.1 60.4
current portion
Short-term debt 100.0 0.7
----- ---
Total $14,456.6 100.0%
*/ Includes preferred stock and company-obligated mandatorily
redeemable preferred securities.
25
<PAGE>
As the foregoing shows, even taking into account the acquisition debt, CP&L
Energy's pro forma consolidated common equity to total capitalization ratio of
36.2% will comfortably exceed the "traditionally acceptable 30% level."20 See
---
Northeast Utilities, 50 S.E.C. at 440, n. 47. Moreover, the transaction will
- -------------------
have no effect on the capitalization of CP&L, Florida Power or NCNG. Common
equity as a percentage of capitalization of each of these three companies is and
will remain well over 30%.
Section 10(b)(3) also requires the Commission to determine whether the
proposed combination will be detrimental to the public interest, the interests
of investors or consumers or the proper functioning of the combined CP&L Energy
system. The proposed transaction between CP&L Energy and Florida Progress is
entirely consistent with the proper functioning of a registered holding company
system. CP&L's and Florida Power's utility operations will be integrated.
Further, the combination will result in substantial, otherwise unavailable,
savings and benefits to the public and to consumers and investors of both
companies, and the integration of CP&L and Florida Power will improve the
efficiency of their respective systems. The integration of CP&L and Florida
Power is described below in Item 3.C.1.(b) and the benefits and savings are
described in Item 3.C.2.
Finally, consummation of the Share Exchange is conditional upon
receipt of numerous regulatory approvals. These regulatory approvals will assure
that the interests of customers are adequately protected. FERC's approval will
further assure that there is no adverse effect on competition. Moreover, as
noted by the Commission in approving Entergy Corporation's acquisition of Gulf
States Utilities, "concerns with respect to investors' interests have been
largely addressed by developments in the federal securities laws and the
securities markets themselves." Entergy Corp., 51 S.E.C. at 883. CP&L Energy,
-------------
CP&L, Florida Progress and Florida Power will all be reporting companies subject
to the disclosure requirements of the 1934 Act following the completion of the
Share Exchange. The various reports previously filed by CP&L and Florida
Progress under the Act contain readily available information concerning the
Share Exchange. For these reasons, the Applicants believe that the Share
Exchange will be in the public interest and the interest of investors and
consumers and will not be detrimental to the proper functioning of the resulting
holding company system.
C. Section 10(c)
-------------
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of section 8 or
is detrimental to the carrying out of the provisions of section
11; or
- -----------------------------
20 Under section 7(d)(1) of the Act, the Commission generally has
required a registered holding company system and its public-utility subsidiaries
to maintain a 65/30 debt/common equity ratio, the balance generally being
preferred equity. Such debt/equity capitalization requirement was included in
Rule 52, as originally adopted, as applied to securities issued by
public-utility subsidiaries, but was eliminated in 1992.
26
<PAGE>
(2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system.
1. Section 10(c)(1)
(a) The Share Exchange will be lawful under Section 8
Section 10(c)(1) first requires that the Share Exchange be lawful
under Section 8. That section was intended to prevent holding companies, by the
use of separate subsidiaries, from circumventing state restrictions on common
ownership of gas and electric operations. The Share Exchange will not result in
any new situation of common ownership of so-called "combination" systems within
a given state. CP&L provides electric service and its subsidiary, NCNG, provides
gas service in North Carolina. The affiliation of CP&L and NCNG was expressly
approved by the NCUC. Accordingly, the Share Exchange does not raise any issue
under Section 8.
(b) The Share Exchange will not be detrimental to carrying out
the provisions of Section 11
Section 10(c)(1) also requires that the Share Exchange not be
"detrimental to the carrying out of the provisions of section 11." Section
11(b)(1) directs the Commission generally to limit a registered holding company
"to a single integrated public-utility system." At issue is whether the
combination of CP&L and Florida Power, each of which is an electric utility,
will result in a system that is "detrimental to the carrying out of the
provisions of section 11."
In the early years of its administration of the Act, the Commission
construed Section 11(b)(1) to preclude significant geographic expansion by
holding company systems. However, as the Commission has acknowledged, the Act
"creates a system of pervasive and continuing economic regulation that must in
some measure at least be fashioned from time to time to keep pace with changing
economic and regulatory climates."21 In recent decisions, the Commission has
cited U.S. Supreme Court and Circuit Court of Appeals cases that recognize that
an agency is not required to "establish rules of conduct to last forever,"22 but
must "adapt [its] rules and policies to the demands of changing circumstances"23
and to "treat experience not as a jailer but as a teacher."24 Consequently, the
Commission has attempted to "respond flexibly to the legislative, regulatory and
technological changes that are transforming the structure and shape of the
- -----------------------------
21 Union Electric Co., 45 S.E.C. 489 at n. 52 (1974), quoted in
------------------
Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (April 30, 1996)
- ----------------------------
(authorizing international joint venture to engage in energy marketing
activities); Eastern Utilities Associates, Holding Co. Act Release No. 26232
----------------------------
(Feb. 15, 1995) (removing restrictions on energy management activities); and
Southern Co., 50 S.E.C. 1328 (1992) (approving acquisition of foreign
- ------------
public-utility subsidiary company).
22 Rust v. Sullivan, 500 U.S. 173 (1991); American Trucking Assns.,
---- -------- ------------------------
Inc. v. Atchison, T.&S.F.R. Co., 387 U.S. 397 (1967); Shawmut Assn. v. SEC, 146
- ---- ---------------------- ------------ ---
F.2d 791 (1st Cir. 1945).
23 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb.
-----------------------
10, 1999), citing Rust v. Sullivan at 186-187. Accord, Sempra Energy, Holding
---- -------- ------ -------------
Co. Act Release No. 26971 n.23 (Feb. 1, 1999) (interpreting the integration
standards of the Act as applied to gas companies in light of developments in the
gas industry).
24 NIPSCO Industries, Inc., supra, citing Shawmut Assn. v. SEC at
----------------------- ----- -------------- ---
796-97.
27
<PAGE>
utility industry," as recommended by the Division of Investment Management (the
"Division") in its June 1995 report to the Commission entitled "The Regulation
of Public-Utility Holding Companies" (the "1995 Report"). Indeed, with specific
reference to the integration requirements of the Act, the 1995 Report explains:
The statute recognizes ... that the application of the integration
standards must be able to adjust in response to changes in "the state
of the art." As discussed previously, the Division believes the SEC
must respond realistically to the changes in the utility industry and
interpret more flexibly each piece of the integration equation.25
Moreover, the ultimate question has always been whether, on the facts of a given
matter, the proposed transaction will lead to a recurrence of the evils the Act
was intended to address.26 See also Sempra Energy, Holding Company Act Release
--- ---- -------------
No. 26971 (Feb. 1, 1999), in which the Commission acknowledged that "we have
taken notice of developments that have occurred in the gas industry, and have
interpreted the Act and analyzed proposed transactions in light of these changed
and changing circumstances."
As explained more fully below, the combination of the electric
operations of CP&L and Florida Power will result in a single, integrated
electric utility system.
(i) Integration of Electric Operations
The threshold question is whether the electric utility properties of
Florida Power can be combined with those of CP&L to form a single "integrated
public-utility system," which, as applied to electric utility companies, is
defined in Section 2(a)(29)(A) to mean:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more States, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
As the definition suggests, and as the Commission has observed,
Section 11 is not intended to impose "rigid concepts" but rather creates a
"flexible" standard designed "to accommodate changes in the electric utility
industry." UNITIL Corp., 50 S.E.C. 961, 967 (1992) (citing Mississippi Valley
------------ -------------------------
Generating Co., 36 S.E.C. 159, 186 (1955)); see also Yankee Atomic Electric.
- ------------- --- ---- -----------------------
Co., 36 S.E.C. 552, 564 - 565 (1955) ("We think it is clear from the language of
- ---
Section 2(a)(29)(A), which defines an integrated public utility system, that
Congress did not intend to imposed [sic] rigid concepts with respect thereto.")
(citations omitted); and Madison Gas and Electric Company v. SEC, 168 F.3d.
---------------------------------------
1337, 1343 (D.C. Cir. 1999) ("By its terms . . . section 10(c)(1) does not
- -----------------------------
25 1995 Report at 71.
26 AEP, 46 S.E.C. at 1306.
---
28
<PAGE>
require that new acquisitions comply to the letter with section 11"). Section
2(a)(29)(A) expressly directs the Commission to consider the "state of the art"
in analyzing the integration requirement. As indicated above, the Commission is
not constrained by its past decisions interpreting the integration standards
based on a different "state of the art." See AEP, supra (noting that the state
--- --- -----
of the art -- technological advances in generation and transmission, unavailable
thirty years earlier -- served to distinguish a prior case and justified "large
systems spanning several states.") 46 S.E.C at 1310.
(a) Interconnection. The first requirement for an integrated
---------------
electric utility system is that the electric generation and/or transmission
and/or distribution facilities comprising the system be "physically
interconnected or capable of physical interconnection." Historically, the
Commission has focused on physical interconnection through facilities that the
merger parties own or, by contract, control.27 However, the 1995 Study
recommended that the Commission "adopt a more flexible interpretation of the
geographic and physical integration standards, with more emphasis on whether an
acquisition will be economical and subject to effective regulation." 1995 Report
at 70. The 1995 Report also recommended that the Commission should increasingly
rely on an acquisition's demonstrated economies and efficiencies, rather than
upon physical interconnection, to meet the integration standard. Id. at 73. The
1995 Report noted that the Act provides the necessary flexibility and that the
application of the integration standards must be able to adjust in response to
changes in the "state of the art." The 1995 Report concluded that it would be a
logical extension of prior orders for the Commission to find that wheeling and
other forms of sharing power (such as reliability councils and proposed regional
transmission groups) also qualify as interconnection. This recommendation is
particularly significant in view of FERC's open access transmission policy, as
set forth in Order No. 888, 28 and, more recently, the issuance of Order No.
2000, which establishes the framework for the formation of regional transmission
organizations ("RTOs") and provides economic incentives for utilities to
participate in the timely formation of qualified RTOs.29
- -----------------------------
27 See, e.g., Northeast Utilities, 50 S.E.C. 427 (1990) at n.75
--------- -------------------
supplemented, 50 S.E.C. 511 (1991), aff'd sub nom. City of Holyoke v. SEC., 972
----- --- --- -----------------------
F.2d 358 (D.C. Cir. 1992) (Northeast had the right to use a Vermont Electric
line for ten years, with automatic two-year extensions, subject to termination
upon two years notice, in order to provide power to a Northeast affiliate.);
Centerior Energy Corp., 49 S.E.C. 472 (1986) (Cleveland Electric Illuminating
- ----------------------
Company and Toledo Edison Company were connected by a line owned by Ohio Edison.
All three were members of the Central Area Power Coordination Group ("CAPCO").
The line connecting Cleveland Electric, Ohio Edison and Toledo Edison was a
CAPCO line with segments owned by each of the three named utilities); Cities
------
Service Power & Light Co., 14 S.E.C. 28, 53 n. 44 (1943) (two companies in the
- -------------------------
same holding company system were found to be interconnected where energy was
transmitted between two separated parts of the system over a transmission line
owned by the United States Bureau of Reclamation, under an arrangement which
afforded the system the privilege of using the line).
28 "Promoting Wholesale Competition Through Open Access
---------------------------------------------------
Non-Discriminatory Transmission Service by Public Utilities; Recovery of
- ------------------------------------------------------------------------
Stranded Costs by Public Utilities and Transmitting Utilities," FERC Stats. &
- -------------------------------------------------------------
Regs., Regulations Preambles,P. 31,036 (1996) ("Order No. 888"), order on
rehearing, FERC Stats. & Regs., Regulations Preambles,P. 31,048 (1997) ("Order
888-A"), order on rehearing, 81 FERCP. 61,248 (1997) ("Order 888-B"), order on
------------------ --------
rehearing, 82 FERCP. 61,046 (1998) ("Order 888-C").
- ---------
29 See "Regional Transmission Organizations," (Final Rule), 89 FERC
--- -----------------------------------
P. 61,285 (Dec. 20, 1999), order on rehearing 90 FERC P. 61,201 (Feb. 25, 2000)
------------------
("Order 2000-A"). Order 2000 requires all regulated utilities (other than those
already participating in an approved RTO) that own, operate or control
interstate transmission facilities to file by October 15, 2000, a proposal for
an RTO, or a description of any efforts made by the utility to participate in an
RTO, or, alternatively, an explanation of the reasons for not participating and
any obstacles to participation in an RTO.
29
<PAGE>
The cornerstone of Order No. 888 is the concept of "comparability,"
i.e., the principle that all transmission users should have access to
- ----
transmission capacity that is comparable to the access enjoyed by the owner of
the transmission. To enforce that principle, Order No. 888 mandates that all
public utilities provide non-discriminatory access to their transmission systems
pursuant to an open access transmission tariff. In Order No. 2000, FERC went a
step further by establishing certain ground rules, and a timetable, for the
development of RTOs. RTOs are required to carry forward the concepts of
comparability and open access. They are expected to serve as the vehicle for
implementing non-discriminatory open access transmission service across regional
areas, which will have the effect of bringing distant utility systems closer
together.
As previously noted, CP&L and Florida Power will be physically
interconnected following the Share Exchange via the Contract Path, which will
extend from the Southern/Florida Interface to the Duke Power/CP&L eastern
control area interface, a distance of about 350 miles. To create the Contract
Path, CP&L has reserved firm transmission service on the Southern Company and
Duke Power transmission systems from south to north for an initial one-year
period, with renewal rights, commencing January 1, 2001. The Applicants expect
to use the Contract Path to serve native load within CP&L's service territory by
providing energy from Florida Power when it is economical to do so, as well as
to market Florida Power capacity and energy to third parties. In addition, the
Contract Path may also provide a source of reserve capacity for CP&L. The
Contract Path, coupled with the availability of significant non-firm
transmission capacity between the two companies, as described below, will enable
the Applicants to substitute more economic power from generation resources
located in one control area for generation resources in another control area
when the substitute generation resources are less expensive to run.
The Contract Path, in and of itself, satisfies the physical
interconnection requirement of Section 2(a)(29)(A). The Commission in the past
has found the interconnection requirement met where the parties had a firm
contract path. See, e.g., Centerior Corp., 49 S.E.C. at 478 ("The physical
--- --- --------------
interconnection requirements of Section 2(a)(29)(A) are met if the two service
areas are connected by power transmission lines that the companies have the
right to use whenever needed"). The Commission has stated in a series of
decisions that contract rights cannot be relied on to integrate two "distant"
systems. See, e.g., WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April
--- --- -----------------
14, 1998), n. 39, citing Northeast Utilities, supra, n. 75, and UNITIL Corp.,
------ ------------------- ----- ------------
supra, n. 30. However, a careful reading of those decisions indicates that the
- -----
Commission was less concerned with the length of a contract path, per se, in
terms of whether two distant utilities can satisfy the "physical
interconnection" requirement of Section 2(a)(29)(A), than with whether the
resulting system would be confined to a "single area or region," thereby
securing the benefits of localized management, efficient operation, and
effective regulation. The Commission did not hold in any of these cases that the
length of a firm contract path was relevant in determining whether the
"physically interconnected or capable of physical interconnection" requirement
of Section 2(a)(29)(A) was met. Such a holding would be contrary to the literal
language of Section 2(a)(29)(A). Furthermore, in this case, the Contract Path
contemplates wheeling across only two utility systems (Southern Company and Duke
Power), both of which, like CP&L, are members of SERC. In today's utility
30
<PAGE>
market, two wheels does not constitute an unusually long transmission path.
Further, as discussed below, CP&L and Florida Power are clearly within a "single
area or region."
The Contract Path is a reasonable and cost-effective means of
interconnecting the CP&L and Florida Power systems. Importantly, it will enable
the Applicants to operate their systems in a coordinated manner, as described
below, thereby producing economies and efficiencies of operation. Although the
capacity of the Contract Path is relatively modest, this is in part dictated by
the fact that opportunities for power exchanges between CP&L and Florida Power
will likely be limited in the near term. Each company is currently obligated to
provide service to its respective native load customers (including its full
requirements wholesale customers). The amount of generating capacity available
to each company after serving its native load is relatively small, particularly
during peak load conditions. Consequently, it is expected that energy exchanges
between CP&L and Florida Power will tend to occur initially over periods of
relatively short duration, e.g., a few hours or days at a time. For such
---
short-term and intermittent exchanges, a purchase of a larger block of firm,
year-round, transmission service would be uneconomical and, in fact, would run
counter to the purposes and objectives of Order No. 888.
Under Order No. 888, transmission users no longer need to build their
own transmission lines or lease them from third parties in order to secure
reliable transmission capacity. Indeed, the primary purpose and effect of Order
No. 888 is to give transmission users rights of access to third party facilities
that are on a par with the rights of the transmission owners. Consequently,
transmission users do not need to buy more transmission than they need to
support specific transactions.
As indicated, CP&L and Florida Power have concluded that the Contract
Path is adequate in the near term to support anticipated levels of energy flows
from Florida Power to CP&L. Hence, the companies will have 50 MW of firm
capacity available at all times, and this will provide the interconnection
required by the Act. Of course, there may be times when the companies will want
to exchange more than 50 MW for both economy reasons. Rather than reserve firm
transmission on an annual basis to support such intermittent transactions,
however, the companies will rely on transmission service generally available
from intervening utilities on an as-needed basis. This is where FERC's open
access transmission policy plays a direct role in the interconnection of CP&L
and Florida Power. There are numerous transmission paths over which electricity
can be moved from Florida to CP&L. Power can be exported from Florida through
the transmission system of Southern Company, the Municipal Electric Authority of
Georgia ("MEAG"), or the Georgia Transmission Company ("GTC"). From any one of
these three systems, the power can be transmitted to CP&L through the
transmission systems of Duke Power, SCE&G or Santee Cooper.30
The total transmission capacity of these paths is significant. For
example, using data as of February 24, 2000, the OASIS postings of the relevant
transmission providers can be used to show as available over the next 12 months
relatively large amounts of monthly non-firm transmission that could be used by
- -----------------------------
30 An additional transmission path is available through Southern
Company and TVA into CP&L's western control area.
31
<PAGE>
CP&L and Florida Power to transmit power in a northerly direction. 31 The most
restrictive period of posted capacity available to transmit power across the
intervening transmission providers in Georgia (i.e., Southern Company, MEAG and
----
GTC) and through any of the Carolina utilities (i.e., Duke Power, SCE&G or
----
Santee Cooper) to CP&L's eastern control area is 263 MW during June, July, and
August of 2000. The reduction in available transmission capacity during the
summer 2000 months is due primarily to existing confirmed firm monthly
reservations made by transmission customers of Southern Company for this period.
However, the majority (nearly 700 MW) of these reservations were previously
purchased on behalf of Florida Power and therefore could be used by Florida
Power or CP&L to deliver power to Southern Company (assuming the merger was
effective during the relevant timeframe). The amount of transmission capacity as
derived from OASIS in all other examined months is much greater, ranging from at
least 1,286 MW to 1,921 MW. In addition, there are usually significant amounts
of non-firm hourly transmission, which can be used for economy transactions,
that can be made available by the Georgia transmission providers as a result of
the benefit of netting the predominant north-to-south flows against
south-to-north flows. The amount of available transmission capacity posted by
the intervening transmission providers simply reflects the capability of the
transmission facilities in this region, reduced by any confirmed reservations
made by transmission customers (including CP&L and Florida Power) of those
providers. (See Southeast transmission map, filed herewith as Exhibit E-2). More
---
importantly, the OASIS postings indicate that a significant amount of
transmission is available over an entire 12-month period, which suggests that
CP&L and Florida Power will be able to obtain additional non-firm transmission
capacity under the open access transmission tariffs of the intervening utilities
on an as-needed basis, as contemplated by Order No. 888.
The foregoing shows available (i.e., remaining) non-firm transmission
----
capacity, taking into consideration the confirmed reservations made by third
parties, in addition to those made by CP&L and Florida Power, for the next
twelve months. Although there can be no assurance that capacity posted as
available today will be fully available at all times in the future, it is
important to note that additional long-term transmission capacity (over and
above the 50 MW Contract Path) is currently available for 2001 (and presumably
later years) across several of the intervening transmission providers which
would allow for power deliveries by Florida Power to CP&L of several hundred MW.
Moreover, the relatively large amount of capacity posted as available on a
short-term basis over the next 12-month period strongly suggests that
transmission service to interconnect CP&L and Florida Power in a south-to-north
direction will be available most of the time during 2001 and later years, even
if the Applicants elect not to reserve any additional capacity on a long-term
basis.
Planning to obtain some future transmission on an as-needed basis is
not only efficient, it is the most pro-competitive approach to interconnecting
the Applicants' systems. Making large, long-term transmission reservations could
constrain parts of the grid unnecessarily, to the detriment of other potential
transmission users. Therefore, consistent with FERC's open access policies, part
of CP&L's and Florida Power's plan to interconnect and integrate their systems
will be through use of their rights to available transmission capacity under
Order No. 888. The apparent availability of transmission capacity on an
as-needed basis, coupled with the long term reservation of the 50 MW Contract
- -----------------------------
31 OASIS is the FERC-mandated electronic bulletin board on which
transmission operators post the amount of transmission capacity that is
available to potential purchasers. Because of limitations on OASIS postings,
information pertaining to the availability of short-term service for 2001 and
beyond is not available.
32
<PAGE>
Path between Florida Power and CP&L, plainly demonstrates that the two systems
will be "physically interconnected or capable of physical interconnection," as
required by Section 2(a)(29)(A).
The Applicants also considered obtaining a north-to-south transmission
path into Florida from the CP&L system. However, the import capability into
Florida over the Southern/Florida Interface currently is fully subscribed on a
firm basis. Any additional reservation of firm transmission capacity by CP&L
into Florida (assuming it were available) could raise concerns about the
potential anti-competitive effects of the merger. In any event, the Applicants
do not believe that it is necessary in order to satisfy the integration
requirements under the Act for the companies to reserve any additional
transmission capacity into Florida solely to facilitate energy transfers by CP&L
to Florida Power. As previously indicated, Florida Power already holds 438 MW of
transfer capacity into Florida, its allocated share under the Interface
Agreement. This represents about one-ninth of the total transfer capability into
peninsular Florida over the Southern/Florida Interface. Although Florida Power
is currently using substantially all of that allocated capacity to support its
purchases under the Southern UPS Agreement, when that agreement terminates,
Florida Power would have the right to use its allocated share of transfer
capacity to purchase power from other sources outside Florida, including CP&L.
In addition, while the 3,600 MW total transfer capacity on the
Southern/Florida Interface is fully subscribed on a firm basis, the actual net
flows in the southbound direction exceed 3,000 MW in only 7.7% of the hours.32
Thus, even without the ability to reserve a firm north-to-south contract path
from CP&L to Florida Power, it appears that the companies will be able to obtain
non-firm transmission capacity when and as needed during most hours.
(b) Coordination. Historically, the Commission has interpreted
------------
the requirement that an integrated electric system be economically operated
under normal conditions as a single interconnected and coordinated system "to
refer to the physical operation of utility assets as a system in which, among
other things, the generation and/or flow of current within the system may be
centrally controlled and allocated as need or economy directs." See, e.g.,
--- ----
Conectiv, supra, citing The North American Company, 11 S.E.C. 194, 242 (1942),
- -------- ----- --------------------------
aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd on constitutional issues, 327 U.S. 686
- ----- ----- -- ---------------------
(1946). The Commission has noted that, through this standard, Congress "intended
that the utility properties be so connected and operated that there is
coordination among all parts, and that those parts bear an integral operating
relationship to one another." Id. (citations omitted). Applicants submit that
---
the need for "joint economic dispatch" that the Commission has historically
focused on reflects an outdated structure of the industry and regulatory
requirements. So-called "single" dispatch and committed bilateral power
exchanges are not required by the explicit terms of the statute and, indeed, may
be inconsistent with regulatory requirements and the economical and efficient
operation of large systems. Accordingly, Applicants further submit that in
today's environment, the coordination requirement should be deemed satisfied if
utilities are able to achieve efficiencies through such measures as coordinated
generating plant operations; coordinated marketing efforts, both as a buyer and
seller of electricity; joint purchasing and inventory management; the
integration of administrative and general services and programs; and
- -----------------------------
32 See Prepared Direct Testimony of Dr. J. Stephen Henderson, Exhibit
---
No. CF-1300 to FERC Application (Exhibit D-1 hereto), p. 18.
33
<PAGE>
gas/electric convergence measures, which will lead to lower costs for gas as a
fuel for the generation of electricity.
This is not a matter of first impression. Nearly a decade ago, the
Commission found, and the courts agreed, that the coordination requirement could
be satisfied even if power never flowed between two parts of the system.
Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990). Environmental
- --------------------------------- -------------
Action involved the acquisition by a holding company of voting securities of a
- ------
new generating company. The intervenors argued that the acquisition did not
satisfy the standards of the Act in that, among other things, the system's
existing electric utility company had represented only that it might purchase up
-----
to twenty percent of the generating company's capacity if, and only if, the
price of such power was competitive in the market. The Court of Appeals noted
that the utility company might not purchase any of the generating company's
output but, nonetheless, concluded that the Commission had correctly found that
the utility company and generating company could be operated as part of a
coordinated system within the meaning of the Act. Id. at 1264-65, citing
Electric Energy, Inc., 38 S.E.C. 658 (1958) (finding that the acquisition of the
- ---------------------
stock of a new generating company would satisfy the integration standards even
though the companies sponsoring the construction of the generating plant only
pledged to buy any surplus energy remaining after the plant had supplied the
needs of the major purchaser, a federal government agency). More recently, the
Commission found similar types of coordinated operational and administrative
functions to constitute "de facto" integration. Sierra Pacific Resources,
------------------------
Holding Co. Act Release No. 27054 (July 26,1999). Moreover, the coordination of
administrative functions and joint marketing activities were crucial factors in
the Commission's determination that the coordination requirement was satisfied
in Sempra Energy and NIPSCO.
------------- ------
In applying the integration standard, the Commission also looks beyond
simply the coordination of the generation and transmission facilities within a
system to the coordination of other activities. See, e.g., General Public
--- ---- --------------
Utilities Corp., 37 S.E.C. 28 (1956) (integration accomplished through power
- ---------------
dispatching by a central load dispatcher as well as through coordination of
maintenance and construction requirements); Middle South Utilities, Inc., 35
----------------------------
S.E.C. 1 (1953), petition to reopen denied, 36 S.E.C. 383 (1955), rev'd sub nom.
------------------------- --------------
Louisiana Public Service Comm'n v. SEC, 23 5 F.2d 167 (5th Cir. 1956), rev'd,
- ------------------------------- --- -----
353 U.S. 368 (1957), reh'g denied, 354 U.S. 928 (1957) (integration accomplished
------------
through an operating committee which coordinates not only the scheduling of
generation and system dispatch, but also makes and keeps records and necessary
reports, coordinates construction programs and provides for all other
interrelated operations involved in the coordination of generation and
transmission); North American Company, 32 S.E.C. 169 (1950) (economic
----------------------
integration is demonstrated by the exchange of power, the coordination of future
power demand, the sharing of extensive experience with regard to engineering and
other operating problems, and the furnishing of financial aid to the company
being acquired). See also NIPSCO, supra (functional merger of Bay States and
--- ---- ------ -----
NIPSCO gas supply departments through NIPSCO Services, "a service company
subsidiary of NIPSCO that provides financial, accounting, tax, purchasing,
natural gas portfolio management, and other administrative services to associate
companies.").
The Applicants will satisfy the coordination requirement in several
important ways: First, under the Integration Agreement, CP&L will coordinate the
planning, operation and maintenance of generating capacity resources and the
dispatch of electricity throughout the combined system of CP&L and Florida
34
<PAGE>
Power. The Integration Agreement will provide for coordinated dispatch. Under
this arrangement, system dispatchers will arrange for economy energy sales where
such sales will lower the operating costs of the purchasing company. To allay
any concerns that state commissions and FERC may have, the sales will not be
made if the purchaser has a better purchase opportunity, or the seller has a
better sales opportunity. The Integration Agreement also provides for short-term
capacity and associated energy sales, subject to the same limitations. The
Integration Agreement also provides for joint generation planning and the common
procurement of resources, although, again, the agreement addresses potential
state concerns by making explicit that any resource additions will comply with
applicable state procurement requirements. Additionally, the Integration
Agreement also vests in CP&L, as agent, the responsibility of arranging joint
sales and purchases of electricity, as described below, and makes provision for
the allocation of associated costs and revenues.
Second, CP&L and Florida Power will coordinate through joint marketing
efforts, both as a buyer and seller. System dispatchers will continually monitor
the generation needs and capacity of the CP&L/Florida Power systems. CP&L and
Florida Power already have the ability to reach common suppliers, purchasers,
and trading hubs in various combinations. Thus, there will be opportunities for
CP&L and Florida Power to operate their generation assets in a coordinated
fashion by buying and selling power in the wholesale market to decrease the
overall production costs of the two systems. The diversity of weather, generator
outages, fuel supply and localized economic conditions will create opportunities
to allocate resources more efficiently. This can be accomplished without the
need to actually move power from the CP&L system or Florida Power system to the
other company's system on a regular or sustained basis. For example, Florida
Power's 400 MW of capacity under the Southern UPS Agreement could be used from
time to time to support CP&L's long-term firm sales of power to MEAG (up to 160
MW), Santee Cooper (200 MW of peaking capacity after 2001) or NCEMC (800 MW of
peaking capacity, 450 MW of which is located in Duke Power's control area).
Similarly, CP&L's wholly owned subsidiary, Monroe Power Company, which owns and
operates a 160 MW simple-cycle unit in central Georgia and is planning to add an
additional 160 MW unit in 2001, could, subject to the availability of
transmission, support Florida Power's wholesale sales. Further, the combined
resources of CP&L and Florida Power can be used to make opportunity sales in
common trading hubs such as the Entergy and TVA markets.
Third, in order to take advantage of the opportunities presented by
coordinated operation, CP&L will run a system dispatch model of the utilities'
combined resources on a day-ahead basis. The model will identify opportunities
for CP&L and Florida Power to exchange power on an economy basis and to make
short-term off-system sales.
Fourth, the combined system in this matter will be coordinated in a
variety of ways beyond simply the coordination of the generation and marketing
functions within the system. Among other things, virtually all management,
administrative and corporate support services will be provided by CP&L Services
to its associate companies. In addition, the accounting functions of the
combined system will be consolidated through the use of a single system. CP&L
Energy will have a single accounting organization which will be managed by a
single team in one or more locations. The coordination and integration of the
combined system is expected to be further achieved through the coordination and
integration of information system networks; procurement organizations;
35
<PAGE>
organizational structures for power generation, energy delivery and customer
relations; and support services.
In the near term, the Applicants do not intend to implement an
automated economic dispatch capability that would control the output and
delivery of all system generating resources on a system-wide basis, without
regard to ownership. The Applicants believe any proposal to operate in such a
manner would not be well received by their respective state commissions, for at
least two reasons: First, as regulated utilities, CP&L and Florida Power are
required to obtain the best terms in the market, rather than simply assume that
resources available through an affiliate will be the lowest cost source of
supply. And second, as already noted above, each of the utilities will be
expected to provide its respective native load customers with the benefits
associated with each utility's existing assets. That requirement is reflected by
the terms of the Integration Agreement and makes automated economic dispatch
impractical at this time.
Under Section 2(a)(29)(A), the Commission must also find that the
resulting interconnected and coordinated system may be "economically operated."
This calls for a determination that coordinated operation of the combined
company's facilities is likely to produce economies and efficiencies. The
question whether a combined system will be economically operated under Section
10(c)(2) and Section 2(a)(29)(A) was recently addressed by the U.S. Court of
Appeals in Madison Gas and Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir.
-------------------------------- ---
1999). In that case, the court determined that in analyzing whether a system
will be economically coordinated, the focus must be on whether the acquisition
"as a whole" will "tend toward efficiency and economy." Id. at 1341. The Share
--
Exchange will clearly meet this standard. As explained in Item 3.C.2. below,
CP&L Energy and Florida Progress estimate that the net savings from the Share
Exchange will reach at least $100 million annually in the first full year
following closing.
In short, all aspects of the combined system will be centrally and
efficiently planned and operated. As with other merger applications approved by
the Commission, the combined system will be capable of being economically
operated as a single interconnected and coordinated system as demonstrated by
the variety of means through which its operations will be coordinated and the
efficiencies and economies expected to be realized by the proposed transaction.
(c) Single Area or Region. As required by Section 2(a)(29)(A),
---------------------
the operations of CP&L and Florida Power will be confined to a "single area or
region in one or more States." While the terms "area" and "region" are not
defined in the Act, the "single area or region" requirement does not mandate
that a system's operations be confined to a small geographic area or a single
state."33 The Commission has specifically found that the combining systems need
- -----------------------------
33 In considering size, the Commission has consistently found that
utility systems spanning multiple states satisfy the single area or region
requirement of the Act. For example, the Entergy system covers portions of four
states (Entergy Corp, supra), and the Southern Company system provides electric
-------------------
service to customers in portions of four states (Southern Co., supra). As early
-------------------
as 1945, the Commission found that the operations of American Electric Power in
seven states were confined to a single region or area. American Gas and Electric
-------------------------
Co., 21 S.E.C. 575 (1945).
- ---
36
<PAGE>
not be contiguous in order for the requirement to be met.34 Rather, the
Commission has found that the single area or region test should be applied
flexibly when doing so does not undercut the policies of the Act against
"scatteration" -- that is, "the ownership of widely dispersed utility properties
which do not lend themselves to efficient operation and effective state
regulation." NIPSCO, supra (applying the single area or region requirement with
------ -----
respect to gas utility system); accord, Sempra Energy, supra.35
------ ------------- -----
Moreover, the Division has recommended that the Commission "interpret
the 'single area or region' requirement flexibly, recognizing technological
advances, consistent with the purposes and provisions of the Act" and that the
Commission place "more emphasis on whether an acquisition will be economical."
1995 Report at 66, 69. The Division has recognized that "recent institutional,
legal and technological changes ... have reduced the relative importance of...
geographical limitations by permitting greater control, coordination and
efficiencies" and "have expanded the means for achieving the interconnection and
economic operation and coordination of utilities with noncontiguous service
territories." 1995 Report at 69. It has also recognized that the concept of
geographic "integration" has been affected by "technological advances on the
ability to transmit electric energy economically over longer distances, and
other developments in the industry, such as brokers and marketers." Id. Such
---
advances and developments are breaking down traditional boundaries and concepts
of regions. The Commission has confirmed its support for the 1995 Report,
citing, in particular, the Division's recommendation that the Commission
"continue to interpret the `single area or region' requirement of [the 1935 Act]
to take into account technological advances." NIPSCO, supra; accord, Sempra
------ ----- ------ ------
Energy, supra.
- ------ -----
The Applicants believe that the CP&L Energy electric system will
satisfy the "single area or region" requirement. The retail service area of the
CP&L Energy system will be confined to three states (North and South Carolina
and Florida) in a defined geographic region - the southeastern United States.
(See Service Area Map filed as EXHIBIT E-1 hereto). Further, while neither CP&L
nor Florida Power has any retail customer base in Georgia, both make wholesale
sales to customers in Georgia, and CP&L, through a subsidiary, has already
constructed and is planning future construction of generating assets located in
Georgia. Similarly, Florida Power controls approximately 400 MW of generating
capacity located in Georgia and Alabama under the Southern UPS Agreement.
Moreover, Georgia Power jointly owns with Florida Power a 150 MW combustion
turbine unit located at Intercession City in Osceola County, Florida. Georgia
Power uses its portion of the output from this unit to serve loads in Georgia.
Thus, the Carolinas, Georgia and Florida are clearly part of a single bulk power
marketing region.
Moreover, although the physical distance between CP&L and Florida
Power's retail service areas is approximately 350 miles, Applicants do not
believe that the combination of CP&L and Florida Power would contravene the
policy of the Act against "scatteration." As stated in Sempra Energy, supra,
------------- -----
"The Act is directed against the growth and extension of holding companies
[that] bear no relation to economy of management and operation or the
- -----------------------------
34 See, e.g., Conectiv, Inc. Holding Co. Act Release No. 26832 (Feb.
--------- -------- ---
25, 1998); cf. New Century Energies, Inc., Holding Co. Act Release No. 26748
-------------------------
(Aug. 1, 1997) (integration test was met where entities planned to build a
300-mile transmission line to interconnect the systems which operated in
noncontiguous territories).
35 In Gaz Metropolitain, Inc., the Commission agreed that a single
----------------------
area or region could include areas across international borders. Holding Co. Act
Release No. 26170 (Nov. 23, 1994).
37
<PAGE>
integration and coordination of related operating properties." In this case, the
electric operations of CP&L and Florida Power will be economically operated as a
single interconnected and coordinated system. Further, as indicated, CP&L and
Florida Power operate in a defined geographic region (the Southeast U.S.) and
both own or control substantial generating assets that are located in Georgia
and in the parts of North Carolina and South Carolina that are not served by
CP&L. Finally, as demonstrated below, the combined system will not have an
adverse effect upon localized management, efficient operation or effective
regulation.
(d) Size. The final clause of Section 2(a)(29)(A) requires the
----
Commission to look to the size of the combined system (considering the state of
the art and the area or region affected) and its effect upon localized
management, efficient operation, and the effectiveness of regulation. In the
instant matter, these standards are easily met. The size of the CP&L Energy
electric system will not impair the advantages of localized management,
efficient operation or the effectiveness of regulation. Instead, the proposed
transaction will actually increase the efficiency of operations.
Localized Management -- The Commission has found that an acquisition
does not impair the advantages of localized management where the new holding
company's "management [would be] drawn from the present management" (Centerior
Energy Corp, 49 S.E.C. at 479), or where the acquired company's management would
remain substantially intact. (AEP, supra). The Commission has noted that the
distance of corporate headquarters from local management was a "less important
factor in determining what is in the public interest" given the "present-day
ease of communication and transportation." AEP, 46 S.E.C. at 1312. The
---
Commission also evaluates localized management in terms of whether a merged
system will be "responsive to local needs." Id.
The management of CP&L Energy will be drawn primarily from the
existing management of CP&L and Florida Progress and their subsidiaries. CP&L
Energy will maintain its corporate headquarters in Raleigh, North Carolina. The
electric utility subsidiaries will continue to operate through regional offices
with local service centers and line crews available to respond to customers'
needs. CP&L Energy will preserve the well-established delegations of authority
- -- currently in place at CP&L and Florida Power -- which permit the local,
district and regional management teams to budget for, operate and maintain the
electric distribution system, and to schedule work forces in order to continue
to provide the high quality of service which the customers of CP&L and Florida
Power have enjoyed in the past. In short, CP&L and Florida Progress will
continue to be managed on a day-to-day basis at a local level, particularly in
areas that must be responsive to local needs. Accordingly, the advantages of
localized management will not be impaired.
Efficient Operation -- As discussed above in the analysis of Section
10(b)(1), the size of CP&L Energy will not impair efficient operation; rather,
the Share Exchange will result in significant economies and efficiencies, as
described in Item 3.C.2 below. Operations (as described in Item 1.F.) will be
more efficiently performed on a centralized basis because of economies of scale,
standardized operating and maintenance practices and closer coordination of
system-wide matters.
38
<PAGE>
Effective Regulation -- The proposed transaction will not impair the
effectiveness of regulation at either the state or federal level. Florida Power
will continue to be regulated by the FPSC with respect to retail rates, service
and related matters. CP&L will continue to be regulated by the NCUC and SCPSC
with respect to retail rates, service and related matters.36 On the federal
level, CP&L Energy will be fully regulated as a registered holding company. The
electric utility subsidiaries of CP&L Energy will continue to be regulated by
FERC with respect to interstate electric sales for resale and transmission
services, by the NRC with respect to the operation of nuclear facilities, and by
the FCC with respect to certain communications matters.
(ii) Retention of NCNG's Gas System
Under the "ABC" clauses of Section 11(b)(1), a registered holding
company can own "one or more" additional integrated systems if certain
conditions are met. Specifically, the Commission must find that (A) the
additional system "cannot be operated as an independent system without the loss
of substantial economies which can be secured by the retention of control by
such holding company of such system," (B) the additional system is located in
one state or adjoining states, and (C) the combination of systems under the
control of a single holding company is "not so large ... as to impair the
advantages of localized management, efficient operation, or the effectiveness of
regulation."
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its operation
to a single area or region, in one or more States, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation: Provided, that gas utility
companies deriving natural gas from a common source of supply may be
deemed to be included in a single area or region.
NCNG's gas distribution system constitutes an integrated gas system.
NCNG supplies gas to 110 cities and towns and four municipal gas distribution
systems in a contiguous area of eastern and south central North Carolina. It
purchases gas from a variety of out-of-state sources (chiefly in the Gulf Coast
and southwest producing areas), most of which is delivered to NCNG pursuant to
long-term contracts with Transco and Columbia Gas.
- -----------------------------
36 The CP&L and Florida Power management structures are designed to
facilitate communications with state regulators. Each company has established
departments which have responsibility for state regulatory, environmental and
corporate communications and have other external relations purposes. These
departments provide a point of contact with each of the state regulatory and
environmental offices and have the responsibility for handling all regulatory
contacts, including making state regulatory filings and answering customer
inquiries to the regulatory commissions. It is expected that these departments
will continue to perform these same functions within the respective utility
companies after the Share Exchange.
39
<PAGE>
(a) Loss of Economies. Clause A requires a showing that each
-----------------
additional integrated system cannot be operated as an independent system without
the loss of substantial economies which can be secured by the retention of
control by a holding company of such system. The Commission has historically
considered four ratios as a "guide" to determining whether lost economies are
"substantial" under Section 11(b)(1)(A). Specifically, the Commission has
examined the estimated loss of economies expressed in terms of the ratio of
increased expenses to the system's total operating revenues, operating revenue
deductions (excluding federal income taxes), gross income and net income before
federal income taxes. (See, e.g. WPL Holdings, Inc., Holding Co. Act Release No.
-------- -----------------
26856 (April 14, 1998); and New England Electric System, 41 S.E.C. 886, 893 -
---------------------------
899 (1964).
In a number of early cases, the Commission considered the increases in
operational expenses that were anticipated upon divestiture, but also took into
account, as offsetting benefits, the significant competitive advantages that
were perceived to flow from a separation of gas and electric operations. Among
these was the assumption that a combination of gas and electric operations is
typically disadvantageous to the gas operations and, hence, the assumption that
the public interest and the interests of investors and consumers (the protected
interests under the Act) are promoted by a separation of gas and electric
operations.
Many regulated utilities are in the midst of, or have completed,
restructurings or major transactions designed to permit them to become complete
energy services companies which can offer customers an array of fuels to meet
their complete energy needs through a "one-stop" energy company, an industry
shift that the Commission has expressly recognized. Recently, the Commission has
approved a number of transactions involving the combination of gas companies and
electric companies serving overlapping areas.37 All of those transactions
demonstrate that market forces are pushing for the convergence of electric and
gas operations in one corporate entity; namely, a full service energy utility
company.
Thus, the traditional model of a vertically integrated gas or electric
utility company is becoming, in various regions of the country, obsolete and
evidence continues to mount that the model utility company of the near future
will be the one-stop energy company. The Commission has recognized this trend
and has followed the Division's recommendation made in the 1995 Report to
"liberalize its interpretation of the `ABC' clauses." 1995 Report at 74-76.
In New Century Energies, Inc., supra, the Commission applied the "ABC"
-------------------------- -----
Clauses to a proposed acquisition of two unaffiliated utilities by a new holding
company. The Commission reconsidered and rejected the emphasis in many of its
earlier cases requiring evidence of a severe, even crippling, effect of
divestment upon the separated system. The Commission stated that this approach
is outmoded in the contemporary utility industry. The Commission explained that,
as a result of the convergence of the gas and electric industries now underway,
separation of gas and electric businesses may cause the separated entities to be
weaker competitors than they would be together. This factor therefore operates
to compound the loss of economies represented by increased costs. This view was
repeated in WPL Holdings, Inc. In that case, the Commission noted that, although
-----------------
- -----------------------------
37 See e.g., TUC Holdings Company, et al., Holding Co. Act Release
-------- ----------------------------
No. 26749 (Aug. 1, 1997); BL Holding Corp., Holding Co. Act Release No. 26875
----------------
(May 15, 1998); and Sempra Energy, Holding Co. Act Release No. 26890 (June 26,
-------------
1998); and Northeast Utilities, Holding Co. Act Release No. 27127 (Jan. 31,
-------------------
2000).
40
<PAGE>
franchised monopolies are still the rule, competition among energy suppliers is
increasing and increased expenses of separate operation may no longer be offset,
as they were in New England Electric System, supra, by a gain of qualitative
--------------------------- -----
competitive benefits, but rather may be compounded by a loss of these benefits.
More recently, in Northeast Utilities, Holding Co. Act Release No. 27127 (Jan.
-------------------
31, 2000) ("Northeast/Yankee"), the Commission approved the acquisition by a
----------------
registered electric utility holding company of the stock of a relatively small
gas company serving customers in substantially the same area upon finding that
the companies would operate on a coordinated basis and would realize significant
cost savings after a period of four to five years.
In the present case, following consummation of the Share Exchange, the
entire CP&L Energy system will be operated as a single coordinated system in
that there will be a significant degree of centralized services in CP&L
Services, as well as sharing of existing resources and capabilities of CP&L,
Florida Power and NCNG. Thus, following consummation of the Share Exchange, the
CP&L Energy system will consist of a large integrated electric utility system
operating in three states and a smaller integrated gas utility system which will
operate on a coordinated basis offering services to customers in parts of North
Carolina that overlap CP&L's service territory to a significant extent.
Permitting CP&L Energy to retain NCNG will assure NCNG access to
greater financial and other resources, and, at the same time, enable CP&L to
evolve into a total energy services provider and achieve the other strategic
goals it envisioned in acquiring NCNG. In this regard, a combination electric
and gas utility system can offer a wide range of benefits to customers,
including the convenience and efficiency of dealing with a single energy
supplier. From the customer's standpoint, this can reduce transaction costs
incurred in gathering and analyzing information, contacting energy suppliers,
negotiating terms of multiple service contracts and paying bills. Combining gas
and electric operations can also simplify community planning on energy-related
matters. For utility shareholders and employees, a total energy service provider
is better positioned to respond to a competitive environment and to remain an
attractive investment opportunity for shareholders and an appealing employer for
utility employees.
In contrast, CP&L Energy's competitive position in the market would
suffer as a result of any divestiture of NCNG because, as the electric and gas
industries continue to converge, energy suppliers must be able to offer their
customers a range of energy options. One other gas company in North Carolina
(Public Service Company of North Carolina) has already completed a business
combination with an out-of-state utility that is primarily an electric company
(SCANA Corporation).38 The same sort of merger and acquisition activity
involving combinations of electric companies and gas companies is also taking
place in Pennsylvania, Connecticut, Massachusetts, Ohio, Maryland, and West
Virginia.
In the 1995 Report, the Division noted that "it does not appear that
the SEC's precedent concerning additional systems precludes the SEC from
relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility
industry is evolving toward the creation of one-source energy companies that
will provide their customers with whatever type of energy supply they want,
- -----------------------------
38 See SCANA Corporation, Holding Co. Act Release No. 27133 (Feb. 9,
--- -----------------
2000).
41
<PAGE>
whether electricity or gas." The Division recommended that the Commission
interpret Section 11(b)(1) of the Act to allow registered holding companies to
hold both gas and electric operations as long as each affected state utility
regulatory commission approves of the existence of such a company.
In this connection, it is appropriate for the Commission to consider
that, in approving the affiliation of CP&L and NCNG, the NCUC found that North
Carolina utility customers would benefit in several important respects.
Specifically, the NCUC found that the combination of CP&L and NCNG would help
ensure CP&L an adequate, reliable and cost-effective supply of natural gas for
its gas-fired electric generating assets; promote the expansion of intrastate
natural gas transmission lines in North Carolina, in that the overall economies
of expansion plans would improve when CP&L's need for gas as a fuel is combined
with NCNG's need for gas transportation; and make it more likely that natural
gas service would be extended into unserved parts of North Carolina as and when
CP&L gas-fired generating units become the "anchor tenant" providing the
economic justification for expansion of gas service into the nearby local
communities. While not all of these benefits are quantifiable, they are
undoubtedly important. In this regard, although CP&L has owned NCNG for only a
short time, the two companies are already working together to develop new
pipeline expansions into eastern North Carolina and are jointly managing their
portfolios of gas supply, transportation and storage assets.
Further, in approving CP&L's acquisition of NCNG, the NCUC also
adopted a comprehensive code of conduct and related set of regulatory conditions
designed to, among other things, prevent CP&L and NCNG from unreasonably
favoring their affiliates, assure the continuation of competition between gas
and electric service, and prevent discrimination against other gas-fired
electric generators. Accordingly, to the extent that the preservation of
inter-modal competition between gas and electric service was a significant
reason for forcing the separation of secondary gas systems in the past, it is
clear that these concerns have been addressed by the NCUC.
As indicated above and in more recent Commission precedents, the
Commission has adopted a new model of regulation under the Act which permits
convergence of energy services under a registered holding company and which
promotes competition among energy providers. In New Century Energies, supra, the
-------------------- -----
Commission relied on both increased expenses and the potential loss of
competitive advantages that could result from separation from the electric
system in approving the merger. The Applicants believe that, consistent with
recent precedents, the Commission should in this case defer to the judgment of
the NCUC as to the strategic benefits that North Carolina consumers will realize
from the combination of CP&L and NCNG, which would be forfeited if CP&L Energy
were obligated to divest NCNG.
(b) Same State or Adjoining States. The proposed Share Exchange
------------------------------
does not raise any issue under Section 11(b)(1)(B) of the Act, as NCNG is
located and operates exclusively in North Carolina, a state in which CP&L
operates. Thus, the requirement that each additional system be located in one
state or adjoining states is satisfied.
(c) Size. Further, retention of NCNG as an additional integrated
----
system raises no issue under Section 11(b)(1)(C) of the Act. The combination of
the systems under the control of a single holding company will not be "not so
large ... as to impair the advantages of localized management, efficient
42
<PAGE>
operation, or the effectiveness of regulation." As the Commission has recognized
elsewhere, the determinative consideration is not size alone or size in an
absolute sense, either big or small, but size in relation to its effect, if any,
on localized management, efficient operation and effective regulation. From
these perspectives, it is clear that the continued combination of the gas
operations under CP&L Energy is not too large.
Based on data through September 30, 1999 (pro forma to include the
results of operations of NCNG for 12 months), and giving effect to the Share
Exchange, NCNG's natural gas operations will represent only 2.4% of net utility
plant of CP&L Energy; operating revenues for the natural gas operations will
represent only 3.1% of total utility revenues; and natural gas customers will
constitute only 4.2% of all utility customers, while electric operations will
represent 95.8%.
As indicated, since acquiring NCNG, the gas procurement functions of
NCNG and CP&L have been centralized. CP&L now administers the combined
portfolios of supply, transportation and storage contracts for the two
companies. In most other respects, the local operations of NCNG continue to be
handled from NCNG's regional offices. Management is therefore geographically
close to the gas operations, thereby preserving the advantages of localized
management. Finally, from the standpoint of regulatory effectiveness, it must be
reiterated that the NCUC just recently approved CP&L's acquisition of NCNG
subject to regulatory conditions and adoption of a code of conduct designed to
preserve competition and prevent against other forms of affiliate abuse.
(iii) Retention of Other Businesses
With one exception,39 the non-utility interests of CP&L and Florida
Progress are fully retainable under the standards of Section 11(b)(1) of the
Act. As a result of the Share Exchange, the non-utility businesses and interests
of CP&L and Florida Progress described in Item l.C. above will become businesses
and interests of CP&L Energy. Corporate charts showing the subsidiaries,
including non-utility subsidiaries of CP&L and Florida Progress, are filed as
EXHIBITS E-3 and E-4. A corporate chart showing the projected arrangement of
these subsidiaries under CP&L Energy is filed as EXHIBIT E-5.
Standard for retention: Section 11 (b)(1) permits a registered holding
company to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system." The Commission has historically interpreted this
provision to require an operating or "functional" relationship between the
non-utility activity and the system's core utility business. See, e.g. Michigan
--------- --------
Consolidated Gas Co., 44 S.E.C. 361 (1970), aff'd, 444 F.2d 913 (D.C. Cir.
- --------------------
1971); United Light and Railways Co., 35 S.E.C. 516 (1954); CSW Credit, Inc., 51
----------------------------- ----------------
S.E.C. 984 (March 2, 1994); and Jersey Central Power and Light Co., Holding Co.
----------------------------------
Act Release No. 24348 (March 18, 1987).
- -----------------------------
39 Inasmuch as Florida Progress has already initiated efforts to
divest Mid-Continent, a life insurance company, it is unnecessary for the
Commission to address the whether Mid-Continent would be retainable by CP&L
Energy under the standards of Section 11(b)(1). It is requested that the
Commission reserve jurisdiction over the question of retention of Mid-Continent
by CP&L Energy. In the event that Mid-Continent has not been sold by Florida
Progress before the effective date of the Share Exchange, CP&L Energy will
continue to explore opportunities to sell Mid-Continent.
43
<PAGE>
In 1997, in response to a recommendation made by the Division in the
1995 Report, the Commission adopted Rule 58,40 which conditionally exempts from
the pre-approval requirements of Sections 9(a) and 10 of the Act the acquisition
by a registered holding company of securities of companies engaged in certain
specified categories of "energy-related" businesses which the Commission has
determined, on the basis of experience, are so closely related to the business
of a public-utility company as to be considered in the ordinary course of a
public utility business. In adopting Rule 58, the Commission "has sought to
respond to developments in the industry by expanding its concept of a functional
relationship." Rule 58 Release at 11. Importantly, Rule 58 does not require that
non-utility businesses of the type covered by the rule be "functionally" related
to a holding company's utility operations at all. As set forth more fully in
Annexes C and D the non-utility business interests that CP&L Energy will hold,
directly or indirectly, following the Share Exchange meet the Commission's
standards for retention, with one exception. Many of CP&L Energy's non-utility
subsidiaries fit within the definition of "energy-related company" under Rule
58.
In approving New Century Energies' retention of the non-utility
businesses of its utility subsidiaries in 1997, the Commission also excluded
such businesses from the limitation upon investment in "energy-related
companies" under Rule 58, noting that the restrictions of Section 11(b)(1) are
applicable to registered holding companies and not to exempt holding companies.
Rule 58 provides in section (a)(1)(ii) thereof that investments in non-utility
activities that are exempt under Rule 58 cannot exceed 15% of the consolidated
capitalization of the registered holding company. In its statement supporting
the adoption of the Rule, the Commission stated:
The Commission believes that all amounts that have actually been
invested in energy-related companies pursuant to commission order
prior to the date of effectiveness of the Rule should be excluded from
the calculation of aggregate investment under Rule 58. The Commission
also believes it is appropriate to exclude from the calculation all
investments made prior to that date pursuant to available exemptions.
Rule 58 Release at 50-51. Because CP&L and Florida Progress are both exempt
holding companies, none of the investments they have heretofore made in
non-utility businesses, as described in Annex C and Annex D hereto, were
pursuant to Commission order. Accordingly, investments made by the two companies
prior to the effective date of the Share Exchange which will be retained after
the Share Exchange should not be counted in the calculation of the 15%
investment limitation.41
- -----------------------------
40 "Exemption of Acquisition by Registered Public-utility Holding
-------------------------------------------------------------
Companies of Securities of Non-utility Companies Engaged in Certain
- -------------------------------------------------------------------
Energy-related and Gas-related Activities," Holding Co. Act Release No. 26667
- -----------------------------------------
(Feb. 14, 1997) ("Rule 58 Release").
41 See, e.g., New Century Energies, Inc., Holding Co. Act Release No.
--------- --------------------------
26748 (Aug. 1, 1997); SCANA Corporation, supra n. 38.
----------------- ----- -
44
<PAGE>
2. Section 10(c)(2)
----------------
Because the Share Exchange is expected to result in substantial cost
savings and synergies, it will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act.
The Share Exchange will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2) of the Act. Although
some of the anticipated economies and efficiencies will be fully realized only
in the longer term, they are properly considered in determining whether the
standards of Section 10(c)(2) have been met. See AEP, supra at 1320 - 1321. Some
--- --- -----
potential benefits cannot be precisely estimated; nevertheless, they too are
entitled to be considered. As the Commission has observed, "[s]pecific dollar
forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable." Centerior Energy Corp., 49 S.E.C. at 480.
----------------------
CP&L and Florida Progress have estimated the nominal dollar value of
synergies from the Share Exchange to be at least $100 million (net of costs to
achieve) annually beginning with the first full year after closing. The Share
Exchange is expected to yield several types of presently quantifiable benefits
and savings in the following areas:42
Integration of Corporate Functions. The combined company should be
able to reduce the number of redundant functions where the staffing levels are
relatively fixed and do not directly vary with an increase or decrease in the
number of employees or customers. Preliminary analyses indicate the integration
of duplicative functions could result in net labor savings of $24 to $32 million
in 2001 and increase to $38 to $45 million by 2003.
Integration of Corporate Programs. The combined company should be able
to integrate corporate and administrative programs which will reduce non-labor
costs in the areas of insurance, advertising, professional services, benefits
plan administration, credit facilities, association dues, and shareholder
services, among others. In addition, future operational expenditures in the area
of information systems that each company would make on a stand-alone basis
should be significantly reduced. Initial examinations project the elimination of
duplicate corporate programs could result in savings of $24 to $32 million in
2001 and rise to $30 to $37 million by 2003.
Purchasing Economies. The combined company should be able to
centralize purchasing functions. It should also be able to obtain purchasing
leverage resulting in greater volume discounts for materials and services.
Initial estimates indicate the combined company could save $2 to $3 million in
2001 increasing to $4 to $6 million by 2003 in O&M expense through initiatives
to centralize purchasing and utilize greater leverage with suppliers. The
capital investment savings related to purchasing centralization is expected to
range from $16 to $18 million in 2001 to $11 to $13 million in 2003.
- -----------------------------
42 All amounts are before transaction expenses (estimated at
approximately $39.9 million) and certain transition costs, e.g., severance
---
costs, relocation expenses, etc. (estimated at $109 million).
45
<PAGE>
Fuel Procurement. The combined company should achieve economies as a
result of its integrated purchasing to meet its larger combined fuel
requirements. More analyses are necessary and underway to reasonably estimate
the amount of savings anticipated from the fuel procurement activities of the
combined company. Currently, at least $1 to $2 million annually in savings is
projected.
Business Optimization. The combined company is considering the
implementation of best practice initiatives which initial estimates indicate
could yield savings of $24 to $30 million in 2001 and increase to $32 to $40
million by 2003.
In addition to the benefits described above, there are other benefits
which, while presently difficult to quantify, are nonetheless substantial. These
include:
Improved Competitive Capability: A combined CP&L/Florida Progress will
be able to meet the challenges of the increasingly competitive environment in
the utility industry more effectively than either CP&L or Florida Progress
standing alone. The Share Exchange will create the opportunity for strategic,
financial and operational benefits for customers in the form of stable rates
over the long term and for shareholders in the form of improved access to
capital markets and financial flexibility.
Expanded Management Resources: A combined CP&L and Florida Progress
entity will be able to draw on a larger and more diverse mid and senior-level
management pool to lead the new company forward in an increasingly competitive
environment for the delivery of energy, and should be better able to attract and
retain the most qualified employees. The employees of CP&L Energy should also
benefit from new opportunities in the expanded organization.
More Diverse Service Territory: The combined service territories of
CP&L and Florida Progress will be larger and more diverse than either of the
service territories of CP&L or Florida Progress as independent entities. This
increased geographical diversity will mitigate the risk of changes in economic,
competitive or climatic conditions in any given sector of the combined service
territory.
These expected savings will meet or exceed the anticipated savings in
a number of recent acquisitions approved by the Commission. See, e.g., Dominion
--- ---- --------
Resources, Inc., et al., Holding Co. Act Release No. 27113 (Dec. 15, 1999)
- -----------------------
(estimated quantifiable benefits of $700 million over the first ten years
following merger); NIPSCO Industries, Inc., Holding Co. Act Release No. 26975
------ ----------------
(Feb. 10, 1999) (estimated expected savings of $57.45 million over ten years);
LG&E Energy Corp., Holding Co. Act Release No. 26866 (April 20, 1998) (estimated
- -----------------
expected savings of $687.3 million over ten years); WPL Holdings, Holding Co.
------------
Act Release No. 26856 (April 14, 1998) (estimated expected savings of $680
million over ten years); Conectiv, Holding Co. Act Release No. 26856 (Feb. 25,
--------
1998) (estimated expected savings of $500 million over ten years); Ameren
------
Corporation, supra (estimated savings of $686 million over ten years); New
- ----------- ----- ---
Century Energies, supra (estimated net savings of $770 million over ten years);
- ---------------- -----
and TUC Holding Company, supra (estimated savings of $505 million over ten
--------------------------
years).
46
<PAGE>
D. Section 10(f)
-------------
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described below under Item 4. "Regulatory Approvals," CP&L Energy
and Florida Progress intend to comply with all applicable North Carolina, South
Carolina and Florida state laws regarding each state's ongoing jurisdiction over
CP&L, Florida Power and NCNG.
E. Intra-system Transactions
-------------------------
The CP&L Energy system companies will engage in a variety of affiliate
transactions for the provision of goods, services, and construction. Certain of
these transactions are elaborated upon below. The sale of goods and services by
CP&L Energy system companies to other CP&L Energy system companies will be
carried out in accordance with the requirements and provisions of Rules 87, 90
and 91 unless otherwise authorized by the Commission by order or by rule.
1. CP&L Services.
--------------
Rule 88(b) provides that "[a] finding by the Commission that a
subsidiary company of a registered holding company ... is so organized and
conducted, or to be so conducted, as to meet the requirements of Section 13(b)
of the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by [Rule] 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified in the instructions for that form,
by such company or the persons proposing to organize it." In this
Application-Declaration, Applicants are not requesting authorization to
establish a new service company, but rather are requesting that the Commission
authorize CP&L Services, a service company that will be organized by CP&L Energy
prior to the Share Exchange, to extend its activities to Florida Progress and
its direct and indirect subsidiaries following the consummation of the Share
Exchange. Accordingly, the Applicants request that the Commission find that CP&L
Services will be so organized and shall be so conducted as to meet the
requirements of Section 13(b), and, further, determine that this
Application-Declaration constitutes a filing on Form U-13-1 for purposes of Rule
88.
CP&L Services will be the service company subsidiary for the CP&L
Energy system. Specifically, CP&L Services will provide services to CP&L, NCNG
and Florida Power pursuant to the Utility Service Agreement and to CP&L Energy
and its direct and indirect non-utility subsidiaries pursuant to the Non-Utility
Service Agreement. The Utility Service Agreement and Non-Utility Service
Agreement, as put in place by CP&L Services prior to the Share Exchange, is not
intended to be changed in any material respect. In accordance with the Utility
47
<PAGE>
Service Agreement, services provided by CP&L Services will be directly assigned,
distributed or allocated by activity, project, program, work order or other
appropriate basis. To accomplish this, employees of CP&L Services will record
their labor and expenses to bill the appropriate client company. Costs of CP&L
Services will be accumulated in accounts of the service company and be directly
assigned, distributed, or allocated to the appropriate client company in
accordance with the guidelines set forth in the Utility Service Agreement and
the Non-Utility Service Agreement. There will be an internal audit group which,
among other things, will audit the assignment of service company charges to
client companies. It is anticipated that CP&L Services will be staffed primarily
by transferring personnel from CP&L and Florida Progress and their respective
subsidiaries. CP&L Services' accounting and cost allocation methods and
procedures will be structured so as to comply with the Commission's standards
for service companies in registered holding company systems. CP&L Services will
conduct substantial operations in Raleigh, North Carolina, where the
headquarters of CP&L Energy and CP&L are located. It may also have a presence in
St. Petersburg, Florida, the headquarters of Florida Progress and Florida Power.
As compensation for services, both the Utility and Non-Utility Service
Agreements provide that each client company shall pay to CP&L Services the cost
to CP&L Services of rendering such services for or on its behalf. Where more
than one client company is involved in or has received benefits from a service
performed, the Service Agreement sets forth methods of assigning, distributing,
or allocating CP&L Services costs to each client company, as well as to other
associate companies. Such methods of assignment, distribution or allocation of
costs may be modified or changed by CP&L Services without the necessity of an
amendment to the Service Agreement provided that, in such instances, all
services rendered shall be at actual cost thereof, fairly and equitably
assigned, distributed or allocated, all in accordance with the requirements of
the Act and any orders thereunder. Thus, charges for all services provided by
CP&L Services to client companies will be as determined under Rules 90 and 91 of
the Act. In the event that any material changes to the Service Agreement or
allocations are needed to more accurately allocate costs, Applicants would
propose those to the Commission as they become known. The Non-Utility Service
Agreement contains provisions similar to those of the Utility Service Agreement.
Thus, services provided by CP&L Services to non-utility client companies
pursuant to the Non-Utility Service Agreement will also be charged as determined
under Rules 90 and 91 of the Act.
Moreover, the Utility and Non-Utility Service Agreements provide that
no material change in the organization of CP&L Services, the type and character
of the companies to be serviced, the methods of allocating costs to associate
companies, or in the scope or character of the services to be rendered subject
to Section 13 of the Act, or any rule, regulation or order thereunder, shall be
made unless and until CP&L Services shall first have given the Commission
written notice of the proposed change not less than sixty days prior to the
proposed effectiveness of any such change. If, upon the receipt of any such
notice, the Commission shall notify CP&L Services within the sixty day period
that a question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order
thereunder, then the proposed change shall not become effective unless and until
CP&L Services shall have filed with the Commission an appropriate declaration
regarding such proposed change and the Commission shall have permitted such
declaration to become effective.
48
<PAGE>
Applicants believe that the Utility Service Agreement and the
Non-Utility Service Agreement are structured so as to comply with Section 13 of
the Act and the Commission's rules and regulations thereunder.
2. Services, Goods, and Assets Involving the Utility Operating
-----------------------------------------------------------
Companies
---------
CP&L, NCNG and Florida Power may provide services to one another and
to other associate companies, using those resources and capabilities that each
of these companies has developed in the conduct of its own business. These
services will be provided to associate companies in accordance with Rules 87, 90
and 91. Moreover, in accordance with Rules 87, 90 and 91, certain goods may be
provided through a leasing arrangement or otherwise by one utility operating
company to one or more associate companies, and certain assets may be used by
one utility operating company for the benefit of one or more other associate
companies.
3. Electric Fuels.
--------------
Electric Fuels will continue to supply substantially all of the coal
requirements of the four coal-fired units at Florida Power's Crystal River
Generating Station pursuant to two existing coal supply agreements. Most of the
coal supplied under these agreements is purchased by Electric Fuels from
unaffiliated suppliers. The Applicants believe that the pricing formulas under
these agreements comply with the requirements of Section 13(b) of the Act and
Rules 81 and 90 through 92, as applicable.
ITEM 4. REGULATORY APPROVAL
A. Required Approvals for Share Exchange.
-------------------------------------
Set forth below is a summary of the regulatory approvals that
Applicants expect to obtain in connection with the Share Exchange. Completion of
the Share Exchange is subject to obtaining regulatory approvals on terms and
conditions that may not reasonably be expected to have a material adverse effect
on the business, operations, properties, assets, condition (financial or
otherwise), results of operations or prospects of CP&L or Florida Progress.
1. Antitrust
---------
The HSR Act and the related rules and regulations prohibit CP&L, CP&L
Energy and Florida Progress from completing the Share Exchange until CP&L, CP&L
Energy and Florida Progress submit required information to the Antitrust
Division of the Department of Justice and the Federal Trade Commission ("FTC")
and the specified HSR Act waiting period requirements have been satisfied.
Even after the HSR Act waiting period expires or terminates, the
Antitrust Division or the FTC may later challenge the Share Exchange on
antitrust grounds. If the Share Exchange is not completed within 12 months after
the expiration or earlier termination of the initial HSR Act waiting period,
CP&L, CP&L Energy and Florida Progress would be required to submit new
information to the Antitrust Division and the FTC, and a new HSR Act waiting
49
<PAGE>
period would begin. The Applicants intend to time the filing of their premerger
notifications under the HSR Act so that the waiting period will expire or
terminate within 12 months before the anticipated closing date of the Share
Exchange.
2. State Approvals
---------------
Carolina Power & Light. The Share Exchange is subject to approval by
the NCUC. On February 3, 2000, CP&L filed an application with the NCUC
requesting such approval. The NCUC Application is filed as EXHIBIT D-1 hereto.
Subject to the plenary jurisdiction of the SCPSC over the operations of CP&L,
neither the Share Exchange nor the issuance of CP&L Energy common stock in
connection with the Share Exchange requires any approval by, or filing with, the
SCPSC. CP&L will continue its practice of constructively working with both the
NCUC and the SCPSC regarding such commissions' ongoing jurisdiction over CP&L's
operations.
Florida Power. Florida Power is subject to the jurisdiction of the
FPSC. Subject to the plenary jurisdiction of the FPSC over the operations of
Florida Power, no filing or approval of the Share Exchange by the FPSC is
required by Florida law. CP&L, CP&L Energy and Florida Progress will continue
Florida Progress's practice of constructively working with the FPSC regarding
its ongoing jurisdiction over Florida Power.
Following the Share Exchange, the regulatory authorities in North
Carolina, South Carolina and Florida will retain applicable authority over the
rates and capital structure of the utilities, affiliated interest transactions
and non-utility businesses.
Mid-Continent, an indirect subsidiary of Florida Progress, is a life
insurance company domiciled in the states of Oklahoma and Texas. Florida
Progress has announced its intention to divest Mid-Continent. However, if
Florida Progress does not divest Mid-Continent prior to the closing of the Share
Exchange, the applicable insurance regulatory authorities in Oklahoma and Texas
would be required to approve the indirect change of control of Mid-Continent
caused by the Share Exchange.
3. Federal Power Act
-----------------
Under the Federal Power Act ("FPA"), the FERC will approve a
combination of electric utilities if it finds that the transaction is
"consistent with the public interest." In reviewing a combination of electric
utilities, the FERC generally evaluates whether the transaction will:
o adversely affect competition;
o adversely affect rates; or
o impair the effectiveness of regulation.
On February 3, 2000, CP&L and Florida Power filed a combined application with
the FERC requesting that the FERC approve the Share Exchange under the FPA. In
connection with this application, the two companies also filed a comparable open
access transmission service tariff pursuant to which transmission services and
50
<PAGE>
specified ancillary services will be offered on a non-discriminatory basis over
the combined systems of CP&L and Florida Power and related agreements under the
FPA, to become effective upon consummation of the Share Exchange. The FERC
Application is filed as EXHIBIT D-3 hereto.
As a condition of obtaining approval of the Share Exchange from the
FERC, CP&L and Florida Power have each agreed to form, join or work toward
developing an RTO which will control some of the combined company's transmission
facilities, and to divest a total of 135 MW of generating capacity (85 MW in the
case of CP&L and 50 MW in the case of Florida Power) in the Carolinas and
Florida through sales of system capacity for a period of six years after
consummation of the Share Exchange. Approval of the Share Exchange from the FERC
may also be conditioned upon certain other requirements.
4. Atomic Energy Act
-----------------
Florida Power holds an NRC operating license for its Crystal River
nuclear generating facility. The operating license authorizes Florida Power to
own and operate the facility. The Atomic Energy Act provides that a license may
not be transferred or in any manner disposed of, directly or indirectly, through
transfer of control unless the NRC finds that the transfer complies with the
Atomic Energy Act and consents to the transfer. Florida Power has filed an
application with the NRC seeking approval for the indirect transfer of control
of Florida Power resulting from the Share Exchange and to reflect the fact that,
after the Share Exchange, although continuing to own and operate the Crystal
River facility, Florida Power will become an operating company subsidiary of the
combined company. The NRC Application was filed with the NRC on January 31,
2000, and is included as EXHIBIT D-5 hereto.
5. Federal Communications Commission
---------------------------------
The FCC must approve the transfer of control of telecommunications
permits or licenses. The Communications Act of 1934 prohibits the transfer,
assignment or disposal in any manner of any construction permit or station
license, or any rights thereunder, to any person without authorization from the
FCC. In addition, a carrier must obtain permission prior to acquisition or
operation of new lines and may not construct or extend a line, or transmit via
such lines, without prior FCC approval. Pursuant to the Communications Act, the
FCC will approve a transfer of control if it serves the public convenience,
interest and necessity. The Applicants will seek the necessary approvals from
the FCC to transfer licenses held by both Florida Power and Progress
Telecommunications and to amend licenses and tariffs, as appropriate. The FCC
Application will be filed by amendment as EXHIBIT D-7.
B. Required Approvals for Affiliate Transactions.
---------------------------------------------
In addition to the foregoing approvals required for the Share
Exchange, the state public service commissions in North Carolina, South Carolina
and Florida all exercise some degree of regulatory oversight over transactions
between regulated public utilities and their affiliates and associate companies.
51
<PAGE>
1. The North Carolina Utilities Commission.
---------------------------------------
The NCUC must review and approve agreements for services provided to
CP&L by certain affiliated companies pursuant to N.C. Gen. Stat.ss.62-153(b).
CP&L, NCNG and the NCUC Public Staff have agreed on certain regulatory
conditions related to the filing and review of service agreements, asset
transfers, financings, and other affiliate agreements in connection with the
NCUC's approval of the holding company structure. See Docket Nos. E-2, SUB 753,
---
P-708, SUB 5, and G-21, SUB 387, North Carolina Utilities Commission. For
example, condition 4 forbids CP&L and NCNG from the taking of any service from
an affiliated company "where the costs incurred for that service (whether
directly or through allocation) exceed market value." Id., Regulatory Condition
4.
CP&L, NCNG and CP&L Energy also agreed with the NCUC Public Staff that
they would request this Commission to include the following language designed to
preserve the NCUC's jurisdiction over the treatment in rates of any affiliate
contracts in any order issued by the Commission approving the creation of CP&L
Energy and the acquisition of CP&L and NCNG:
Approval of this application in no way precludes the NCUC from
scrutinizing and disallowing charges incurred or made or allowing or
imputing a different level of such charges when setting rates for
services rendered to customers of affiliated public utilities in North
Carolina. (Regulatory Condition 3).
The Commission further finds that its approval of this acquisition or
future financing arrangements does not preclude the NCUC or other
regulatory authority from setting rates based on the assumption of a
capital structure, a corporate structure, debt costs or equity costs
that varies from the structure(s) or cost(s) approved by the
Commission in this Order. (Regulatory Condition 6).
CP&L, NCNG, CP&L Energy and their affiliates recognize that the NCUC
wishes to preserve its state law authority, under present or future
state law, to require approval of transfers of control or ownership of
any asset or portion thereof from CP&L, NCNG, or one or more of their
affiliates to nonjurisdictional operations, affiliates, or
nonaffiliates. Without conceding their right to assert that the NCUC
does not and should not have such authority, CP&L, NCNG, CP&L Energy
and their affiliates request the Commission to state, in its order
approving the instant acquisition, that the Commission does not intend
its approval of the acquisition to preclude a future state commission
order mandating or otherwise exercising state authority over such a
transfer of assets. (Regulatory Condition 10).
2. South Carolina Public Service Commission.
----------------------------------------
The SCPSC also has statutory authority to review affiliated interests'
transactions and charges, "if so ordered by the [Public Service] Commission,"
under the Code of Laws of South Carolina, ss. 58-27-2090. The SCPSC may examine
the fairness and reasonableness of affiliate transactions and determine the
"absence of injurious effect upon the public interest" in order to decide
whether any affiliate fees and charges may be allowed "for rate-making
purposes." Id. The SCPSC and CP&L have agreed in Docket No. 1999-434-E/C to
52
<PAGE>
substantially similar Regulatory Conditions as were established by the NCUC,
including conditions related to agreements and transactions with affiliates.
As was the case in North Carolina, CP&L and CP&L Energy agreed with
the South Carolina Consumer Advocate that they would request this Commission to
include the following language designed to preserve the SCPSC's jurisdiction
over the treatment in rates of any affiliate contracts in any order issued by
the Commission approving the creation of CP&L Energy and the acquisition of
CP&L:
Approval of this application in no way precludes the SCPSC from
scrutinizing and disallowing charges incurred or made or allowing or
imputing a different level of such charges when setting rates for
services rendered to customers of affiliated public utilities in South
Carolina. (Regulatory Condition 42).
CP&L and CP&L Energy recognize that the SCPSC wishes to preserve its
state law authority under present or future state law, to require
approval of transfers of control or ownership of any asset or portion
thereof from CP&L to one or more nonpublic utility operations, or
other affiliates, or non-affiliates. Notwithstanding the reservation
of CP&L's and CP&L Energy's rights to assert that the SCPSC does not
and should not have such authority, CP&L and CP&L Energy request the
Commission to state, in its order approving the instant application,
that the Commission does not intend its approval of the application to
preclude a future state commission order mandating or otherwise
exercising state authority over such a transfer of assets. (Regulatory
Condition 46).
The Commission further finds that its approval of this acquisition or
future financing arrangements does not preclude the SCPSC or other
regulatory authority from setting rates based on the assumption of a
capital structure, a corporate structure, debt costs or equity costs
that varies from the structure(s) or cost(s) approved by the
Commission in this Order. (Regulatory Condition 50).
3. Florida Public Service Commission.
---------------------------------
The FPSC does not require investor-owned utilities to obtain advance
approval of transactions with affiliated companies. Instead, pursuant to FPSC
Rule 25-6.1351, the FPSC requires investor-owned utilities to file an annual
Diversification Report listing all transactions with affiliated companies for
FPSC review. Each utility must maintain detailed records to facilitate auditing
and analysis of these transactions. The FPSC has authority to take corrective
action to safeguard ratepayers from any adverse effects of affiliated
transactions where deemed appropriate.
ITEM 5. PROCEDURE
The Share Exchange is anticipated to be implemented as soon as
practicable. To facilitate this schedule, Applicants respectfully request the
Commission to issue and publish promptly the requisite notice under Rule 23 with
53
<PAGE>
respect to the filing of this application-declaration to provide for the filing
of comments in a time frame that permits the Commission to enter an order
granting and permitting this application to become effective by August 1,
2000. A form of notice suitable for publication in the Federal Register is
included herewith as EXHIBIT H.
Applicants waive a recommended decision by a hearing officer or any
other responsible officer of the Commission and request that there be no
thirty-day waiting period between the issuance of the Commission's order and the
date on which it is to become effective. Applicants consent to the Division of
Investment Management assisting in the preparation of the Commission's decision
or order in this matter, unless such Division opposes this Application.
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS:
--------
<S> <C> <C>
A-1 Amended and Restated Articles of Incorporated by reference to Exhibit B
Incorporation of CP&L Energy to Registration Statement on Form S-4 in
File No. 333-86243
A-2 Amended and Restated By-Laws of CP&L Incorporated by reference to Exhibit C
Energy to Registration Statement on Form S-4 in
File No. 333-86243
A-3 Restated Charter of CP&L, as amended on Incorporated by reference to Exhibit
May 10, 1996 3(i) to Quarterly Report on Form 10-Q
for the period ended June 30, 1997 in
File No. 1-3382
A-4 By-Laws of CP&L, as amended on March 17, Incorporated by reference to Exhibit
1999 3b(3) to Annual Report on Form 10-K for
the year ended December 31, 1998 in File
No. 1-3382
A-5 Restated Articles of Incorporation of Incorporated by reference to Exhibit
Florida Progress, as amended November 25, 3(a) to the Annual Report on Form 10-K
1991. for the year ended December 31, 1991 in
File No. 1-8349
A-6 Bylaws of Florida Progress, as amended To be filed by amendment
March 3, 2000.
54
<PAGE>
A-7 Amended Articles of Incorporation of Incorporated by reference to Exhibit
Florida Power, as amended September 24, 3(a) to the Annual Report on Form 10-K
1987. for the year ended December 31, 1991 in
File No. 1-3274
A-8 Bylaws of Florida Power, as amended Incorporated by reference to Exhibit
January 21, 1988 3.(b) to Annual Report on Form 10-K for
the year ended December 31, 1995 in File
No. 1-3274
B-1 Amended and Restated Agreement and Plan of Included as "Annex A" to the Joint
Exchange, dated as of August 22, 1999, as Preliminary Proxy (EXHIBIT C-2 hereto)
amended and restated March 3, 2000, by and -----------
among CP&L, Florida Progress and CP&L
Energy
B-2 Form of Service Agreement between CP&L Filed herewith (except Appendix A, which
Services and Utility Company Affiliates will be filed by amendment)
B-3 Form of Service Agreement between CP&L Filed herewith (except Appendix A, which
Services and Non-Utility Company Affiliates will be filed by amendment)
B-4 Form of Service Agreement between Utility Filed herewith (except Appendix A, which
Company and Associate Companies in the will be filed by amendment)
CP&L Energy System
B-5 Credit Agreement for Acquisition Debt To be filed by amendment
B-6 System Integration Agreement Filed herewith
B-7 Contingent Value Obligation Agreement Included as "Annex D" to the Joint
Preliminary Proxy (EXHIBIT C-2 hereto)
-----------
C-1 Registration Statement of CP&L Energy on To be filed by amendment
Form S-4 (including the Definitive Proxy
Statement of CP&L Energy)
55
<PAGE>
C-2 Joint Preliminary Proxy of CP&L Energy and Incorporated by reference to File No.
Florida Progress on Schedule 14A 1-3382 (CP&L) and File No. 1-8349
(Florida Progress)
D-1 NCUC Application Filed herewith
D-2 NCUC Order To be filed by amendment
D-3 FERC Application under Section 203 of the (Paper format filing - Form SE)
Federal Power Act
D-4 FERC Order of Approval To be filed by amendment
D-5 NRC Application under Atomic Energy Act Filed herewith
D-6 NRC Order To be filed by amendment
D-7 FCC Application for Transfer of Licenses To be filed by amendment
D-8 FCC Order To be filed by amendment
E-1 Map of Combined Service Areas of CP&L, (Paper format filing - Form SE)
Florida Power and NCNG
E-2 Transmission Map of Southeast (Paper format filing - Form SE)
E-3 CP&L corporate chart (Paper format filing - Form SE)
E-4 Florida Progress corporate chart (Paper format filing - Form SE)
E-5 CP&L Energy combined company corporate (Paper format filing - Form SE)
chart
G-1 Opinion of Salomon Smith Barney Inc. Included as "Annex B" to the Joint
Preliminary Proxy (EXHIBIT C-2 hereto)
-----------
G-2 Opinion of Merrill Lynch, Pierce, Fenner & Included as "Annex C" to the Joint
Smith Incorporated Preliminary Proxy (EXHIBIT C-2 hereto)
-----------
H Form of Federal Register Notice Filed herewith
56
<PAGE>
I-1 Annual Report of CP&L on Form 10-K for the Incorporated by reference to File No.
year ended December 31, 1998 1-3382
I-2 Annual Report of NCNG on Form 10-K for the Incorporated by reference to File 0-82
fiscal year ended September 30, 1998
I-3 Combined Annual Report of Florida Progress Incorporated by reference to File Nos.
and Florida Power on Form 10-K for the 1-8349 and 1-3274
year ended December 31, 1998
I-4 Quarterly Report of CP&L on Form 10-Q for Incorporated by reference to File No.
the quarter ended March 31, 1999 1-3382
I-5 Quarterly Report of NCNG on Form 10-Q for Incorporated by reference to File No.
the quarter ended December 31, 1998 0-82
I-6 Quarterly Report of Florida Progress on Incorporated by reference to File No.
Form 10-Q for the quarter ended March 31, 1-8349
1999
I-7 Quarterly Report of Florida Power on Form Incorporated by reference to File No.
10-Q for the quarter ended March 31, 1999 1-3274
I-8 Quarterly Report of CP&L on Form 10-Q for Incorporated by reference to File No.
the quarter ended June 30, 1999 1-3382
I-9 Quarterly Report of NCNG on Form 10-Q for Incorporated by reference to File No.
the quarter ended March 31, 1999 0-82
I-10 Quarterly Report of Florida Progress on Incorporated by reference to File No.
Form 10-Q for the quarter ended June 30, 1-8349
1999
I-11 Quarterly Report of Florida Power on Form Incorporated by reference to File No.
10-Q for the quarter ended June 30, 1999 1-3274
57
<PAGE>
I-12 Quarterly Report of CP&L on Form 10-Q for Incorporated by reference to File No.
the quarter ended September 30, 1999 1-3382
I-13 Quarterly Report of NCNG on Form 10-Q for Incorporated by reference to File No.
the quarter ended June 30, 1999 0-82
I-14 Quarterly Report of Florida Progress on Incorporated by reference to File No.
Form 10-Q for the quarter ended September 1-8349
30, 1999
I-15 Quarterly Report of Florida Power on Form Incorporated by reference to File No.
10-Q for the quarter ended September 30, 1-3274
1999
I-16 Current Report of Florida Progress on Form Incorporated by reference to File No.
8-K, dated August 22, 1999 1-8349
I-17 Current Report of Florida Progress on Form Incorporated by reference to File No.
8-K, dated August 23, 1999 1-8349
I-18 Current Report of CP&L on Form 8-K, dated Incorporated by reference to File No.
August 23, 1999 1-3382
I-19 Current Report of CP&L on Form 8-K, dated Incorporated by reference to File No.
August 30, 1999 1-3382
I-20 Statement by CP&L on Form U-3A-2 for year Incorporated by reference to File No.
ended December 31, 1999 69-477
I-21 Statement by Florida Progress on Form Incorporated by reference to File No.
U-3A-2 for the year ended December 31, 1999 69-267
B. FINANCIAL STATEMENTS:
--------------------
FS-1 CP&L Consolidated Statements of Income for See Annual Report of CP&L on Form 10-K
last three fiscal years ended December 31, for the year ended December 31,
1998 in 1998 File No. 1-3382 (EXHIBIT I-1 hereto)
-----------
58
<PAGE>
FS-2 CP&L Consolidated Balance Sheets as of See Annual Report of CP&L on Form 10-K
December 31, 1998 for the year ended December 31, 1998 in
File No. 1-3382 (EXHIBIT I-1 hereto)
-----------
FS-3 NCNG Consolidated Statements of Income for See Annual Report of NCNG on Form 10-K
the last three fiscal years ended for the fiscal year ended September 30,
September 30, 1998 1998 in File No. 0-82 (EXHIBIT I-2 hereto)
-----------
FS-4 NCNG Consolidated Balance Sheet as of See Annual Report of Florida Power on
September 30, 1998 Form 10-K for the fiscal year ended
September 30, 1998 in File No. 0-82
(EXHIBIT I-2 hereto)
------------
FS-5 Florida Progress Consolidated Statements See Annual Report of Florida Progress on
of Income for the last three fiscal years Form 10-K for the year ended December 31, 1998
ended December 31, 1998 in File No. 1-8349 (EXHIBIT I-3 hereto)
-----------
FS-6 Florida Progress Consolidated Balance See Annual Report of Florida Progress on
Sheet as of December 31, 1998 Form 10-K for the year ended December 31, 1998
in File No. 1-8349 (EXHIBIT I-3 hereto)
-----------
FS-7 Florida Power Statements of Income for the See Annual Report of Florida Power on
last three fiscal years ended December 31, Form 10-K for the year ended December 31, 1998
1998 in File No. 1-3274 (EXHIBIT I-3 hereto)
-----------
FS-8 Florida Power Balance Sheet as of December See Annual Report of Florida Power on
31, 1998 Form 10-K for the year ended December 31, 1998
in File No. 1-3274 (EXHIBIT I-3 hereto)
-----------
FS-9 Unaudited Pro Forma Combined Condensed To be filed by amendment.
Statement of Income for the twelve months
ended December 31, 1999
FS-10 Unaudited Pro Forma Combined Balance Sheet To be filed by amendment.
as of December 31, 1999
</TABLE>
59
<PAGE>
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The proposed transaction will neither involve a "major federal action"
nor "significantly affect the quality of the human environment," as those terms
are used in Section 102(2)(c) of the National Environmental Policy Act. The
proposed transaction will not result in changes in the operations of the
Applicants that would have any impact on the environment. No Federal agency has
prepared or is preparing an environmental impact statement with respect to the
reorganization.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this Application
Declaration to be signed on its behalf by the undersigned thereunto duly
authorized.
CP&L ENERGY, INC.
/s/ Robert B. McGehee
----------------------------------
Name: Robert B. McGehee
Title: Executive Vice President,
General Counsel and Chief Administrative
Officer
FLORIDA PROGRESS CORPORATION
/s/ Kenneth E. Armstrong
----------------------------------
Name: Kenneth E. Armstrong
Title: Vice President and General
Counsel
Date: March 14, 2000
60
<PAGE>
Annex A
DESCRIPTION OF GENERATING
ASSETS OF CP&L
The CP&L electric generating stations owned as of December 31, 1999
are as follows:
- ---------------------------------------- ------------------- -------------------
Name of Station and Maximum Dependable Primary Fuel Source
Location Capacity (MW) * (c)
- ---------------------------------------- ------------------- -------------------
Fossil:
- ---------------------------------------- ------------------- -------------------
Asheville Units 1, 2 & 3 557 Coal/Gas/Oil
(Skyland, NC) (a)
- ---------------------------------------- ------------------- -------------------
Cape Fear Units 5 & 6 316 Coal
(Moncure, NC)
- ---------------------------------------- ------------------- -------------------
Darlington County Plant Units 12 & 13 240 Gas/Oil
(Hartsville, SC)
- ---------------------------------------- ------------------- -------------------
H.B. Robinson Unit 1 174 Coal
(Hartsville, SC)
- ---------------------------------------- ------------------- -------------------
H.F. Lee Units 1, 2 & 3 407 Coal
(Goldsboro, NC) (a)
- ---------------------------------------- ------------------- -------------------
L.V. Sutton Units 1,2, & 3 613 Coal
(Wilmington, NC)
- ---------------------------------------- ------------------- -------------------
Mayo 745 Coal
(Roxboro, NC) (b)
- ---------------------------------------- ------------------- -------------------
Roxboro Units 1, 2, 3 & 4(b) 2,462 Coal
(Roxboro, NC)
- ---------------------------------------- ------------------- -------------------
Morehead 15 Oil
(Morehead City, NC)
- ---------------------------------------- ------------------- -------------------
W.H. Weatherspoon 314 Coal/Gas/Oil
(Lumberton, NC)
- ---------------------------------------- ------------------- -------------------
Total Fossil: 5843
- ---------------------------------------- ------------------- -------------------
Nuclear:
- ---------------------------------------- ------------------- -------------------
H.B. Robinson Unit 2 683 Nuclear
(Hartsville, SC)
- ---------------------------------------- ------------------- -------------------
Brunswick Units 1 & 2 1,631 Nuclear
(Southport, NC)(b)
- ---------------------------------------- ------------------- -------------------
Harris 860 Nuclear
(New Hill, NC)(b)
- ---------------------------------------- ------------------- -------------------
Total Nuclear: 3,174
- ---------------------------------------- ------------------- -------------------
<PAGE>
- ---------------------------------------- ------------------- -------------------
Hydro:
- ---------------------------------------- ------------------- -------------------
Marshall (Marshall, NC) 5 Water
- ---------------------------------------- ------------------- -------------------
Blewett (Lilesville, NC) 22 Water
- ---------------------------------------- ------------------- -------------------
Tillery (Mt. Gilead, NC) 86 Water
- ---------------------------------------- ------------------- -------------------
Walters (Waterville, NC) 105 Water
- ---------------------------------------- ------------------- -------------------
Total Hydro: 218
- ---------------------------------------- ------------------- -------------------
Other:
- ---------------------------------------- ------------------- -------------------
53 coal, hydro and combustion turbine 893 Various
units ranging from 2.5 MW to 78 MW
- ---------------------------------------- ------------------- -------------------
Combined Total : 10,128
- ---------------------------------------- ------------------- -------------------
Notes to Table:
* A measure of the unit capability planned to be available at the time
of the system peak load net of seasonal reductions in unit capability due to
weather, steam flow, fuel availability, and station horsepower, including
requirements for air and water quality control equipment.
(a) On August 18, 1998, CP&L filed with the NCUC an application for a
Certificate of Public Convenience and Necessity to construct an
additional 177 MW of combustion turbine capacity adjacent to CP&L's
Lee Steam Electric Plant in Wayne County, North Carolina and a second
160 MW combustion turbine unit at CP&L's Asheville Steam Electric
Plant in Buncombe County, North Carolina. The Wayne County Turbine is
in addition to the 500 MW of combustion turbine capacity for which
CP&L received a Certificate of Public Convenience and Necessity on
March 21, 1996. These units will primarily be used during periods of
summer and winter peak demands. By order issued December 17, 1998, the
NCUC granted CP&L a Certificate to construct both units. Construction
of the combustion turbines began during the first quarter of 1999.
Commercial operation is anticipated to begin in June 2000.
(b) The capacity shown includes the Power Agency's share of generating
facilities that are jointly owned by CP&L and Power Agency. Pursuant
to certain agreements with CP&L, Power Agency has acquired undivided
ownership interests of 18.33% (299 MW) in Brunswick Unit Nos. 1 & 2,
12.94% (91 MW in Roxboro Unit No. 4, and 16.17% in Harris Unit No. 1
(139 MW) and Mayo Unit No. 1 (120 MW).
(c) Of the CP&L generating capability, 53% is coal, 31% is nuclear, 2% is
hydro, and 14% is fired by other fuels including No. 2 oil, natural
gas and propane.
2
<PAGE>
ANNEX B
DESCRIPTION OF GENERATING
ASSETS OF FLORIDA POWER
The Florida Power electric generating stations owned December 31, 1999 as
follows:
------------------------- ----------------------- ---------------------
Name of Station and Winter Net Maximum Major Fuel Source
Location Dependable
Capacity (MW)1
------------------------- ----------------------- ---------------------
Fossil:
------------------------- ----------------------- ---------------------
Crystal River: 383 Coal
Unit #1
(Citrus, FL)
------------------------- ----------------------- ---------------------
Crystal River 479 Coal
Unit #2
(Citrus, FL)
------------------------- ----------------------- ---------------------
Crystal River 722 Coal
Unit #4
(Citrus, FL)
------------------------- ----------------------- ---------------------
Crystal River 732 Coal
Unit #5
(Citrus, FL)
------------------------- ----------------------- ---------------------
Anclote 1,044 Oil/Gas
(Pasco, FL)
------------------------- ----------------------- ---------------------
Bartow 671 Oil/Gas
(Pinellas, FL)
------------------------- ----------------------- ---------------------
Suwannee River 347 Oil/Gas
(Suwannee, FL)
------------------------- ----------------------- ---------------------
Hines Unit 1 2 529 Gas/Oil
(Polk, FL)
------------------------- ----------------------- ---------------------
Tiger Bay 223 Gas
(Polk, FL)
------------------------- ----------------------- ---------------------
Avon Park 64 Oil/Gas
(Highlands, FL)
------------------------- ----------------------- ---------------------
Bayboro 232 Oil
(Pinellas, FL)
------------------------- ----------------------- ---------------------
DeBary 762 Oil/Gas
(Volusia, FL)
------------------------- ----------------------- ---------------------
Higgins 134 Gas
(Pinellas, FL)
------------------------- ----------------------- ---------------------
Intercession City 3 912 Oil/Gas
(Osceola, FL)
------------------------- ----------------------- ---------------------
Rio Pinar 16 Oil
(Orange, FL)
------------------------- ----------------------- ---------------------
<PAGE>
------------------------- ----------------------- ---------------------
Turner 194 Oil
(Volusia, FL)
------------------------- ----------------------- ---------------------
University of Fla. 41 Gas
(Alachua, FL)
------------------------- ----------------------- ---------------------
Total Fossil: 7485 Coal/Oil/Gas
------------------------- ----------------------- ---------------------
Nuclear:
------------------------- ----------------------- ---------------------
Crystal River 782 Uranium
Unit #3
(Citrus, FL)
------------------------- ----------------------- ---------------------
Total Nuclear: 782
------------------------- ----------------------- ---------------------
Combined Total 4 8,267
(Fossil and Nuclear)
------------------------- ----------------------- ---------------------
-----------------------------
1 A measure of the unit capability planne d to be available at the time of
the system peak load net of seasonal reductions in unit capability due to
weather, steam flow, fuel availability, and station horsepower, including
requirements for air and water quality control equipment.
2 In 1999, state regulators approved a plan to increase the level of
reserve generating capacity in Florida from 15 percent to 20 percent by the
summer of 2004. In response, Florida Power will seek proposals from
qualified bidders to provide new generating capacity to be available
beginning in 2003 at a lower cost than the generation obtained from the
construction of a planned second generating unit at the Hines site. The
bids will be evaluated on the basis of location, price, reliability and
other factors. Hines 2 will use the same combined-cycle technology as Hines
Unit 1 and is expected to have a winter generating capacity of
approximately 570 megawatts.
3 Florida Power and Georgia Power Company ("Georgia Power") are co-owners
of a 168 MW advanced combustion turbine located at Florida Power's
Intercession City site. Georgia Power has the exclusive right to the output
of this unit during the months of June through September. Florida Power has
that right for the remainder of the year.
Construction has commenced on three peaking power generation units at
Florida Power's Intercession City site. The units are designed to provide
electricity during periods of peak customer demand and are projected to
provide a total of approximately 280 MW of power beginning in December
2000. The new units are combustion turbine units capable of using either
natural gas or oil, depending on cost and availability of those fuel
sources.
4 Of the total system generating capability, 90.5% is fossil fuel and 9.5%
is nuclear.
Florida Progress Corporation, Florida Power's parent company, also owns an
interest in Black River Limited Partnership, a company which is excluded
from this chart and operates a 49.9 MW cogeneration facility at Ft. Drum,
NY. Black River Limited Partnership is currently in the process of selling
the facility.
2
<PAGE>
<TABLE>
<CAPTION>
ANNEX C
CP&L'S NON-UTILITY SUBSIDIARIES AND INVESTMENTS
1. Wholly owned subsidiaries of CP&L:
- -------------------- ------------------ ---------------------------------------- ----------------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
CP&L Energy, Inc. North Carolina Formed to serve as new holding File No. 70-9559
company. (pending)
- -------------------- ------------------ ---------------------------------------- ----------------------
Capitan Corporation Tennessee Organized to hold title to certain land Prior
and water rights used in CP&L's Commission
operations. precedent 1
- -------------------- ------------------ ---------------------------------------- ----------------------
CaroFinancial, Inc. Delaware Formed to hold certain passive Inactive
financial investments. Its only
remaining asset is a promissory note
receivable evidencing debt incurred
by company ESOP plan.
- -------------------- ------------------ ---------------------------------------- ----------------------
CaroFund, Inc. North Carolina Participates through CaroHome, LLC Prior
and other ventures in which Commission
CaroHome, LLC has invested in precedent 2
affordable housing projects for low-
income individuals primarily in North
Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
CaroHome, LLC North Carolina Promotes CP&L's investments in Same
affordable housing for low-income
individuals. (For investments held,
see part 5, below).
- -------------------- ------------------ ---------------------------------------- ----------------------
Interpath North Carolina Provides Internet-based services and Section 34 - will
Communications, and Virginia markets fiber optic capacity to seek ETC status
Inc. telecommunications carriers.
(For subsidiaries, see part 4, below)
- -------------------- ------------------ ---------------------------------------- ----------------------
Monroe Power North Carolina Owns and operates a 160 MW Section 32 -
Company simple-cycle combustion turbine unit EWG
in Monroe, Georgia.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
- -----------------------------
1 The Commission has previously approved the retention of subsidiaries
engaged in real estate activities. See UNITIL Corporation, Holding Co. Act
--- ------------------
Release No. 25524 (Apr. 24, 1992).
2 See WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14,
--- -----------------
1998) and Ameren Corporation, Holding Co. Act Release No.26809 (Dec. 30, 1997).
------------------
<PAGE>
<TABLE>
<CAPTION>
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Strategic Resource North Carolina Directly and through various Prior
Solutions Corp. subsidiaries designs, develops, Commission
installs, and provides facilities and Precedent;3 Rule
energy management software systems and 58(b)(1)(i)
other services for educational,
commercial, industrial and
governmental markets nationwide.
(For subsidiaries, see part 3, below)
- -------------------- ------------------ ---------------------------------------- ----------------------
2. Passive investments held by CP&L (percentage interest indicated):
- -------------------- ------------------ ---------------------------------------- ----------------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
- -------------------- ------------------ ---------------------------------------- ----------------------
Absolut Limited North Carolina Participates in affordable housing Prior
Partnership LP projects Commission
(99%) precedent 4
- -------------------- ------------------ ---------------------------------------- ----------------------
Better Homes for North Carolina Participates in affordable housing Same
Garner (99%) projects
- -------------------- ------------------ ---------------------------------------- ----------------------
Capital City Low North Carolina Participates in affordable housing Same
Income Housing LP projects
(99%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Walnut Street LP North Carolina Participates in affordable housing Same
(99%) projects
- -------------------- ------------------ ---------------------------------------- ----------------------
WNC Institutional California Participates in affordable housing Same
Tax Credit Fund, LP projects
(99%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Maxey Flats, LLC Virginia Participates in affordable housing Same
(3%) projects
- -------------------- ------------------ ---------------------------------------- ----------------------
Powerhouse Square, North Carolina Organized to facilitate the renovation Same
LLC (99.9%) of several historic buildings in North
Carolina
- -------------------- ------------------ ---------------------------------------- ----------------------
Utech Venture Delaware Provides venture capital for new Prior
Capital Corporation technology to benefit electric Commission
(9.76%) utilities, augment research and Precedent;5 Rule
development, provide investors 58(b)(1)(ii)
with a window on technical
developments, and provide partnering
opportunities to new start-up companies
that offer new products and services to
the utility industry.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
- -----------------------------
3 See Cinergy Corp., Holding Co. Act Release No. 26662 (Feb. 7, 1997);
--- ------------
see also Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998).
- -------- -------------
4 WPL Holdings, Inc., Ameren Corp., supra n. 2.
----------------- ----------- -----
5 See General Public Utilities Corp., Holding Co. Act Release No. 26230
--- -----------------------------
(Feb. 8, 1995) (approving proposal to acquire limited partnership interest in
venture capital fund formed to invest in companies commercializing various
electro-technologies).
2
<PAGE>
<TABLE>
<CAPTION>
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Utech Climate Delaware Established to make investments in Same
Challenge Fund LP entrepreneurial companies that offer
(9.8%) products or services that will generate
greenhouse gas emission reductions for
submission to the Department of Energy
as Climate Challenge Credits.
- -------------------- ------------------ ---------------------------------------- ----------------------
Carousel Capital North Carolina Venture capital fund that focuses on Prior
Partners, LP (3.1%) investments in established, Commission
strategically positioned, mid-sized Precedent under
companies located primarily in the Section 9(c)(3)6
Southeast.
- -------------------- ------------------ ---------------------------------------- ----------------------
NC Enterprise Fund, North Carolina This partnership was established to Same
LP (5%)*/ assist new business ventures in the
State of South Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
I-40 Enterprises, North Carolina Organized to build and to sell or lease Same
LLC (53.4%) an industrial building in the Northchase
Industrial Park located on Interstate 40
in New Hanover County.
- -------------------- ------------------ ---------------------------------------- ----------------------
South Atlantic Florida Provides equity funds to privately-owned Same
Private Equity Fund emerging growth companies in both
IV, LP (8.9%) technology and non-technology related
markets, with an emphasis on investments
located in Florida, the southeastern
United States and Texas.
- -------------------- ------------------ ---------------------------------------- ----------------------
Palmetto Seed South Carolina This partnership was established to Same
Capital Challenge assist new business ventures in the
Fund LP (3.7%) State of South Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
Utility Competitive Delaware Seeks long-term capital appreciation Same
Advantage Fund, through venture capital investments in
LLC (11.1%) entrepreneurial ventures that assist
utilities in retaining and building
their customer base, improving cost
efficiencies, and/or generating new
revenue opportunities.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
*/ NCNG also holds a .248567% interest in NC Enterprise Fund.
- -----------------------------
6 WPL Holdings, Inc., Ameren Corp., supra n. 2.
----------------- ----------- -----
3
<PAGE>
<TABLE>
<CAPTION>
3. Wholly owned subsidiaries of Strategic Resource Solutions Corp.:
- -------------------- ------------------ ---------------------------------------- ----------------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Applied Computer Delaware Develops and sells energy and facilities Prior Commission
Technologies Corp. software systems for educational Precedent;7 Rule
institutions. 58(b)(1)(i)
- -------------------- ------------------ ---------------------------------------- ----------------------
ACT Controls, Inc. North Carolina Develops and installs energy and Same
facilities management systems for
educational institutions.
- -------------------- ------------------ ---------------------------------------- ----------------------
Spectrum Controls, . North Carolina Develops, installs and services energy Same
Inc and facilities management systems for
educational institutions as well as
commercial and industrial customers.
- -------------------- ------------------ ---------------------------------------- ----------------------
SRS Engineering North Carolina Sole purpose is to hold professional Inactive
Corp. engineering license in North Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
4. Subsidiaries of Interpath Communications, Incorporated (percentage
ownership indicated):
- -------------------- ------------------ ---------------------------------------- ----------------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
- -------------------- ------------------ ---------------------------------------- ----------------------
Autonomous Delaware Organized as a national IP network with Section 34 - will
Networks, LLC points of presence in four major U.S. seek ETC status
(33-1/3%%) cities. A full mesh ATM network
implemented on leased circuits connects
the points of presence.
- -------------------- ------------------ ---------------------------------------- ----------------------
CFN FiberNet, LLC North Carolina Markets wholesale capacity to network Same
(20%) carriers for its five members in
Virginia, North Carolina and South
Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
BellSouth Carolinas Delaware Owns and operates a PCS network in North Same
PCS, LP (10%) Carolina and markets related services to
PCS customers.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
- -----------------------------
7 See note 3, above.
---
4
<PAGE>
<TABLE>
<CAPTION>
5. Passive investments held by CaroHome, LLC (percentage interest
indicated):
- -------------------- ------------------ ---------------------------------------- ----------------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Affordable Housing North Carolina Participates in affordable housing Prior Commission
Developers, LLC projects. precedent 8
(51%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Anaheim Affordable, California Participates in affordable housing Same
LP (19.8%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
ARV Troy Villa, LP Ohio Participates in affordable housing Same
(19.8%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Bradford Place of North Carolina Participates in affordable housing Same
Fuquay-Varina LP (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Siler City (99.99%) North Carolina Participates in affordable housing Same
projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Cedar Tree Washington Participates in affordable housing Same
Properties, LP (25%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Lumberton-Chestnut North Carolina Participates in affordable housing Same
Place LLC (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Dillon Apartments of South Carolina Participates in affordable housing Same
South Carolina* (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Enston Home LP* (99%0 South Carolina Participates in affordable housing Same
projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Excelsior Apartments North Carolina Participates in affordable housing Same
LP* (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
First Partners II, LP Massachusetts Participates in affordable housing Same
(15.8%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Garden Spring Housing North Carolina Participates in affordable housing Same
Association, LLC (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
The Garner School North Carolina Participates in affordable housing Same
Apartments LP (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Wilmington-Hooper North Carolina Participates in affordable housing Same
School Apts, LLC projects.
(99.99%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Mountainside LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
- -----------------------------
8 WPL Holdings, Inc., Ameren Corp., supra n. 2.
----------------- ----------- -----
5
<PAGE>
<TABLE>
<CAPTION>
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Meadow Spring Housing North Carolina Participates in affordable housing Same
Assoc. LLC (99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Hartsville Apartments South Carolina Participates in affordable housing Same
LP* (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Manor Associates LP* South Carolina Participates in affordable housing Same
(99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Asheboro-North Forest North Carolina Participates in affordable housing Same
LLC (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Northgate II LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Knightdale Development North Carolina Participates in affordable housing Same
LLC (99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Parkview Housing North Carolina Participates in affordable housing Same
Associate LP (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Prarie Limited North Carolina Participates in affordable housing Same
Liability Company projects.
(99.99%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Ridgewood Housing North Carolina Participates in affordable housing Same
Assoc LLC (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Arden-River Glen LLC North Carolina Participates in affordable housing Same
(99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Rockwood North LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Rockwood AH-1 LP* North Carolina Participates in affordable housing Same
(99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Marion Apartments LP* South Carolina Participates in affordable housing Same
(99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Spring Forest Housing North Carolina Participates in affordable housing Same
Assoc, LLC (99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Bishopville Apartments South Carolina Participates in affordable housing Same
LP* (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Trinity Ridge LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Havelock-Tyler Place North Carolina Participates in affordable housing Same
Apartments LLC (99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
West Cary Apartments North Carolina Participates in affordable housing Same
LLC (99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Westridge Woods LLC North Carolina Participates in affordable housing Same
(99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Wilrik Hotel North Carolina Participates in affordable housing Same
Apartments LLC 99.9%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Asheville-Woodridge North Carolina Participates in affordable housing Same
LP* (99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Knightdale Apts. LLC North Carolina Participates in affordable housing Same
(99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Savannah Place North Carolina Participates in affordable housing Same
Apartments, LLC projects.
(99.99%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Willow Run, LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
Wind Ridge, LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
- -------------------- ------------------ ---------------------------------------- ----------------------
*Projects in which CaroFund, Inc. holds an interest.
6. Subsidiaries of NCNG (percentage ownership indicated).
- -------------------- ------------------ ---------------------------------------- ----------------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
- -------------------- ------------------ ---------------------------------------- ----------------------
Cape Fear Energy North Carolina A gas marketer engaged in purchasing Rule 58(b)(1)(v);
Corporation (100%) natural gas for NCNG's system supply Rule 58(b)(1)(i)
and for resale to large industrial users
and the municipalities served by NCNG,
as well as the business of providing
energy management services.
- -------------------- ------------------ ---------------------------------------- ----------------------
NCNG Cardinal Pipeline North Carolina Participates through Cardinal Pipeline Prior Commission
Investment Corporation Company in intrastate pipeline project. precedent 9
(100%)
- -------------------- ------------------ ---------------------------------------- ----------------------
Cardinal Pipeline North Carolina Formed to acquire an existing intrastate Same
Company, LLC (5%) pipeline and to extend such pipeline in
North Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
NCNG Pine Needle North Carolina Participates through Pine Needle LNG Same
Investment Corporation Company in liquefied natural gas project
(100%) in North Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
- -----------------------------
9 See New Century Energies, Inc., Holding Co. Act Release No. 26748
--- -------------------------
(Aug. 1, 1997) (authorizing registered electric utility holding company with
secondary gas utility system to retain various gas-related investments and
facilities, including investments in pipeline and gas storage subsidiaries).
7
<PAGE>
<TABLE>
<CAPTION>
- -------------------- ------------------ ---------------------------------------- ----------------------
<S> <C> <C> <C>
Pine Needle LNG North Carolina Owns and operates a liquefied natural Same
Company, LLC (5%) gas project in North Carolina.
- -------------------- ------------------ ---------------------------------------- ----------------------
NCNG Energy North Carolina Holds certain energy-related investments Prior Commission
Corporation (100%) and sells natural gas to resellers. precedent 10
- -------------------- ------------------ ---------------------------------------- ----------------------
</TABLE>
- -----------------------------
10 See American Electric Power Company, Inc., et al., Holding Co. Act Release
--- ------------------------------------
No. 26933 (Nov. 2, 1998) (approving investments in non-utility assets that are
incidental and related to energy marketing operations).
8
<PAGE>
<TABLE>
<CAPTION>
ANNEX D
NON-UTILITY SUBSIDIARIES AND INVESTMENTS OF FLORIDA PROGRESS
1. Wholly-owned subsidiaries of Florida Progress:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Progress Capital Florida Intermediate holding company. Intermediate
Holdings, Inc. Holding
Company
- ---------------------- ------------------ ---------------------------------- -----------------
FPC Del, Inc. Delaware Temporary holder of accounts CSW, HCAR 23578
receivable. ---
(Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
Florida Progress Delaware Financing entity Part of
Funding Corporation financing
arrangements
- ---------------------- ------------------ ---------------------------------- -----------------
2. Passive Investment of Florida Progress:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Tampa Bay Devil Florida Class B limited partnership in Rule 40 or
Rays, Ltd. local Major League Baseball team precedent under
ss.9(c)(3)
- ---------------------- ------------------ ---------------------------------- -----------------
3. Subsidiary of Florida Power Corporation:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Energy Solutions, Inc. Florida Markets Centrus L.L.P's Inactive
telecommunications products during
(Centrus L.L.P. is in dissolution) Centrus
L.L.P's
dissolution
- ---------------------- ------------------ ---------------------------------- -----------------
4. Subsidiary of Florida Progress Funding Corporation:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
FPC Capital I Delaware Financing entity Part of
financing
arrangements
- ---------------------- ------------------ ---------------------------------- -----------------
FPC Capital II Delaware Inactive Inactive
- ---------------------- ------------------ ---------------------------------- -----------------
5. Subsidiaries of Progress Capital Holdings, Inc.:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Mid-Continent Life Oklahoma Provider of life insurance Proposed
Insurance Company services in Alabama, Arizona, Divestiture
Arkansas, California, Colorado,
Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kansas, Kentucky,
Louisiana, Michigan, Minnesota,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico,
North Carolina, North Dakota, Ohio,
Oklahoma, Oregon, South Carolina,
South Dakota, Tennessee, Texas,
Utah, Virginia, Washington, West
Virginia, Wisconsin, and Wyoming.
- ---------------------- ------------------ ---------------------------------- -----------------
PIH, Inc. Florida Intermediate holding company for Intermediate
non-utility interests Holding Company
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Reinsurance Cayman Islands A captive insurance company. Conectiv, HCAR
Company, Ltd. --------
27135 (Feb. 10,
2000)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Florida Provider of wholesale Will seek
Telecommunications telecommunications capacity. ETC status.
Corporation
- ---------------------- ------------------ ---------------------------------- -----------------
Progress-Centrus, Inc. Florida Inactive Inactive
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Energy Florida Develops independent and AEP, HCAR 26962
Corporation cogeneration power projects. ---
(Dec. 30, 1998)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Holdings, Florida Participates in marketing alliance Rule
Inc. to multi-site electric customers. 58(b)(1)(vii)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Provisional Florida Investment in real estate UNITIL Corp.,
Holdings, Inc. supporting utility business. -------------
HCAR 25524
(April 24, 1992)
- ---------------------- ------------------ ---------------------------------- -----------------
Electric Fuels Florida Coal procurement and Rule
Corporation transportation and intermediate 58(b)(1)(ix)
holding company for non-utility
interests
- ---------------------- ------------------ ---------------------------------- -----------------
6. Passive Investments of PIH, Inc.:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
American Tax Credit Delaware Passive interest in affordable CSW, HCAR 23578
Corporate Fund III, housing ---
L.P. (Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
Boston Capital Massachusetts Passive interest in affordable CSW, HCAR 23578
Corporate Tax Credit housing ---
Fund VII, (Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
Boston Capital Massachusetts Passive interest in affordable CSW, HCAR 23578
Corporate Tax Credit housing ---
Fund, VII (Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
KeyCorp Investment Ohio Passive interest in affordable CSW, HCAR 23578
Limited Partnership II housing ---
(Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
Lehman Housing Tax New York Passive interest in affordable CSW, HCAR 23578
Credit Fund, L.P. housing ---
(Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
McDonald Corporate Delaware Passive interest in affordable CSW, HCAR 23578
Tax Credit Fund 1996 housing ---
Limited Partnership (Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
National Corporate California Passive interest in affordable CSW, HCAR 23578
Tax Credit Fund VI housing ---
(Jan. 22, 1985)
- ---------------------- ------------------ ---------------------------------- -----------------
7. Subsidiaries of Progress Energy Corporation
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
PEC Fort Drum, Inc. Florida Intermediate holding company Intermediate
Holding Company
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Desal, Inc. Florida Business Development Business
Development
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Power Florida Inactive Inactive
Marketing, Inc.
- ---------------------- ------------------ ---------------------------------- -----------------
8. Subsidiary of PEC Fort Drum, Inc.
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Westmoreland -Ft. Delaware Intermediate holding company Intermediate
Drum, L.P. Holding Company
- ---------------------- ------------------ ---------------------------------- -----------------
9. Subsidiary of Westmoreland-Ft. Drum, L.P.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Westpower-Ft. Drum Virginia Intermediate holding company Intermediate
Holding Company
- ---------------------- ------------------ ---------------------------------- -----------------
10. Subsidiary of Westpower-Ft. Drum, L.P.
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Black River Limited Delaware EWG operator pending acceptance of Has applied for
Partnership application EWG status.1
- ---------------------- ------------------ ---------------------------------- -----------------
11. Subsidiary of Progress Holdings, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Cadence Network, Delaware Marketing alliance for multi-state Rule
L.L.C. electric accounts. 58(b)(1)(vii)
- ---------------------- ------------------ ---------------------------------- -----------------
12. Subsidiaries of Electric Fuels Corporation:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Awayland Coal Kentucky Partner in Powell Mountain Joint Rule 58(b)(1)(ix)
Company, Inc. Venture in Kentucky and Virginia, a
coal mining operation.
- ---------------------- ------------------ ---------------------------------- -----------------
COMCO of America, Florida Inactive Inactive
Inc.
- ---------------------- ------------------ ---------------------------------- -----------------
Dixie Fuels Limited Texas Owner and operator of oceangoing Rule 58(b)(1)(ix)
barges and tugs.
- ---------------------- ------------------ ---------------------------------- -----------------
Dixie Fuels II, Texas Owner and operator of marine Rule 58(b)(1)(ix)
Limited transportation equipment,
terminalling and transporting of
bulk cargoes.
- ---------------------- ------------------ ---------------------------------- -----------------
EFC Synfuel L.L.C. Delaware Intermediate holding company of Intermediate
interest in synthetic fuel plants Holding Company
- ---------------------- ------------------ ---------------------------------- -----------------
</TABLE>
- -----------------------------
1 Black River Limited Partnership is currently in the process of selling
the facility.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Homeland Coal Kentucky Partner in the coal mining Rule 58(b)(1)(ix)
Company, Inc. operation of Powell Mountain Joint
Venture in Kentucky and Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
Kentucky May Coal Virginia Engages in the mining and Rule 58(b)(1)(ix)
Company, Inc. operation of coal facilities in
Kentucky and Ohio.
- ---------------------- ------------------ ---------------------------------- -----------------
Little Black Mountain Kentucky Partner in the Dulcimer Land Rule 58(b)(1)(ix)
Coal Reserves, Inc. Company in Kentucky and Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
Little Black Mountain Kentucky Owner of interest in coal Rule 58(b)(1)(ix)
Land Company reserves.
- ---------------------- ------------------ ---------------------------------- -----------------
MEMCO Barge Line, Delaware Owner, manager and broker of Rule 58(b)(1)(ix)
Inc. river barges and towboats in
Missouri and Louisiana.
- ---------------------- ------------------ ---------------------------------- -----------------
Mesa Hydrocarbons, Florida Owns natural gas reserves and Rule 58(b)(1)(ix)
Inc. wells in Colorado.
- ---------------------- ------------------ ---------------------------------- -----------------
Powell Mountain, Inc. Virginia Has an interest in coal mining Rule 58(b)(1)(ix)
operations in Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Land Florida Ownership and management of coal Rule 58(b)(1)(ix)
Corporation reserves in Kentucky.
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Materials, Florida Commercialization and manufacture Rule 58(b)(1)(x)
Inc. of ash management technologies.
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Metal Kentucky Railcar scrapping and repair, Jersey Central,
Reclamation and metal recycling in Kentucky, --------------
Company Ohio and West Virginia. HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Rail Services Alabama Full-service provider to the Jersey Central,
Corporation railcar industry in Alabama, --------------
Arkansas, California, HCAR 24348
Colorado, Delaware, Georgia, (March 18, 1987)
Florida, Illinois, Indiana, Iowa,
Kentucky, Louisiana, Michigan,
Nebraska, Mississippi, Missouri,
New Jersey, Pennsylvania, South
Carolina, Tennessee, Texas,
Virginia, Wisconsin, Wyoming, and
Alberta, Ontario, and Quebec Canada.
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Synfuel Delaware Intermediate holding company of Intermediate
Holdings, Inc interest in synthetic fuel plants Holding Company
- ---------------------- ------------------ ---------------------------------- -----------------
13. Subsidiary of Awayland Coal Company, Inc:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Powell Mountain Virginia Coal mining in Kentucky and Rule 58(b)(1)(ix)
Joint Venture Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
14. Subsidiary of Homeland Coal Company, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Powell Mountain Virginia Coal mining in Kentucky and Rule 58(b)(1)(ix)
Joint Venture Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
15. Subsidiaries of Kentucky May Coal Company, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Diamond May Coal Kentucky The mining and operation of coal Rule 58(b)(1)(ix)
Company facilities in Kentucky.
- ---------------------- ------------------ ---------------------------------- -----------------
Cincinnati Bulk Delaware The sale and terminalling of coal WPL, HCAR 26856
Terminals, Inc. and other bulk commodities in ---
Ohio and Kentucky. (April 14, 1998)
- ---------------------- ------------------ ---------------------------------- -----------------
Kentucky May Florida Coal mining in Kentucky. Rule 58(b)(1)(ix)
Mining Company
- ---------------------- ------------------ ---------------------------------- -----------------
16. Subsidiaries of Cincinnati Bulk Terminals, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Kanawha River Florida The sale and terminalling of coal Rule 58(b)(1)(ix)
Terminals, Inc. in West Virginia and Kentucky.
Also an intermediate holding
company for interests in synthetic
fuel plants.
- ---------------------- ------------------ ---------------------------------- -----------------
Marigold Dock, Inc. Alabama Owns a coal loading facility in Rule
Kentucky. 58(b)(1)(ix)
- ---------------------- ------------------ ---------------------------------- -----------------
17. Subsidiary of Kanawha River Terminals, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Colona Sub No. 2, Indiana General partner in Colona SynFuel Rule 58(b)(1)(vi)
LLC Limited Partnership, a producer
and seller of solid synthetic fuel.
- ---------------------- ------------------ ---------------------------------- -----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Black Hawk Synfuel Delaware Ownership interest in New River Rule 58(b)(1)(vi)
L.L.C. Synfuel L.L.C., producer of
synthetic fuels; marketing services
- ---------------------- ------------------ ---------------------------------- -----------------
Coal Recovery V, Missouri Research and Development of Rule 58(b)(1)(vi)
L.L.C. Synthetic Fuels
- ---------------------- ------------------ ---------------------------------- -----------------
Colona Newco, Delaware Partner in Colona SynFuel Limited Rule 58(b)(1)(vi)
L.L.C. Partnership, L.L.L.P., producer
and seller of solid synthetic fuel
- ---------------------- ------------------ ---------------------------------- -----------------
18. Subsidiary of Diamond May Coal Company:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Diamond May Mining Florida Coal mining in Kentucky. Rule 58(b)(1)(ix)
Company
- ---------------------- ------------------ ---------------------------------- -----------------
19. Subsidiary of Little Black Mountain Coal Reserves, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Dulcimer Land Kentucky Manages coal reserves in Kentucky Rule 58(b)(1)(ix)
Company and Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
20. Subsidiary of MEMCO Barge Line, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Elmwood Marine Louisiana Engages in the fleeting, washing WPL, HCAR 26856
Services, Inc. and repair of barges in Louisiana, ---
Kentucky and West Virginia and (April 14, 1998)
maintains an ownership interest
in International Marine Terminals
Partnership
- ---------------------- ------------------ ---------------------------------- -----------------
21. Subsidiaries of Elmwood Marine Services, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Conlease, Inc. Louisiana Owner of batture leases in WPL, HCAR 26856
Louisiana. ---
(April 14, 1998)
- ---------------------- ------------------ ---------------------------------- -----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
International Marine Louisiana Owner and operator of a bulk WPL, HCAR 26856
Terminals Partnership materials terminal in Louisiana. ---
(partnership) (April 14, 1998)
- ---------------------- ------------------ ---------------------------------- -----------------
22. Subsidiary of International Marine Terminals Partnership
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
I.M.T. Land Corp. Louisiana Owner of Terminal land in WPL, HCAR 26856
Louisiana. ---
(April 14, 1998)
- ---------------------- ------------------ ---------------------------------- -----------------
23. Subsidiaries of Powell Mountain, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
PMCC, Inc. Virginia Interest in a coal mine operation Rule 58(b)(1)(ix)
in Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
Powell Mountain Coal Virginia Interest in coal mine operations Rule 58(b)(1)(ix)
Company, Inc. in Virginia and Kentucky.
- ---------------------- ------------------ ---------------------------------- -----------------
24. Subsidiary of Powell Mountain Coal Company, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Murphy Land Virginia Partner in the Dulcimer Land Rule 58(b)(1)(ix)
Company, Inc. Company and the owner of coal
property in Kentucky and
Virginia.
- ---------------------- ------------------ ---------------------------------- -----------------
25. Subsidiary of Progress Metal Reclamation Company:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
West Virginia Auto West Virginia Scrap and recycling Jersey Central,
Shredding --------------
HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
26. Subsidiaries of Progress Rail Services Corporation:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Chemetron-Railway Delaware Engages in rail welding services Jersey Central,
Products, Inc. and manufacturing, sale and lease --------------
of welding and rail handling HCAR 24348
equipment in Colorado, (March 18, 1987)
Delaware, Georgia, Iowa,
Illinois, Kentucky,
Missouri, Montana, New
Jersey, Ohio, Pennsylvania,
Wyoming, and, in Canada,
British Columbia, and
Manitoba.
- ---------------------- ------------------ ---------------------------------- -----------------
FM Industries, Inc. Texas Manufacture and repair of railcar Jersey Central,
parts in Texas. --------------
HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
Kentuckiana Railcar Indiana Railcar repair facility in Jersey Central,
Repair and Storage Indiana. --------------
Facility, LLC HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
PRS International Virgin Islands Foreign sales corporation agent Jersey Central,
Sales Company, Inc. in Virgin Islands. --------------
HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Rail de Mexico Marketing, leasing, and selling Jersey Central,
Mexico, S.A. de C.V. railcars and railcar parts. --------------
HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Rail Canada Canada Railcar repair and leasing; Jersey Central,
Corp. supplier of rail and railcar --------------
parts and maintenance-of-way HCAR 24348
equipment. (March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Vanguard Delaware Railcar repair and leasing; Jersey Central,
Corp. supplier of rail and railcar --------------
parts and maintenance-of-way HCAR 24348
equipment in California, Idaho, (March 18, 1987)
Kansas, Kentucky, Nebraska, and
Tennessee.
- ---------------------- ------------------ ---------------------------------- -----------------
Railcar, Ltd. Georgia Lease and sale of railcar Jersey Central,
equipment and the management of --------------
railcar rolling stock in HCAR 24348
Georgia. (March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Southern Machine and Georgia Machine shop design and Jersey Central,
Tool Company fabrication, manufacture of --------------
equipment and railcar HCAR 24348
wheelshop in Georgia and (March 18, 1987)
California.
- ---------------------- ------------------ ---------------------------------- -----------------
United Industries, Inc. Kentucky Railcar repair facility in Jersey Central,
Kentucky. --------------
HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
27. Subsidiary of United Industries, Inc.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Kentuckiana Railcar Indiana Railcar repair facility in Jersey Central,
Repair & Storage Indiana. --------------
Facility, LLC HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
28. Subsidiaries of Railcar, Ltd.:
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
Progress Rail de Mexico Markets, leases and sells Jersey Central,
Mexico, S.A. railcars in Mexico. --------------
de C.V. HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
Servicios Ferroviarios Mexico A Mexican holding and operating Jersey Central,
Progress, S. de R.L. limited liability company that --------------
de C.V. performs railcar repair services. HCAR 24348
(March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
29. Subsidiary of Servicios Ferroviarios Progress, S.de R.L. de C.V.:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------------ ---------------------------------- -----------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
- ---------------------- ------------------ ---------------------------------- -----------------
<S> <C> <C> <C>
Servicios Mexico A L.L.C. providing personnel and Jersey Central,
Administrativos Fyl, administrative services for --------------
S. de R.L. de C.V. Servicios Ferroviarios Progress HCAR 24348
in Mexico. (March 18, 1987)
- ---------------------- ------------------ ---------------------------------- -----------------
</TABLE>
EXHIBIT B-2
SERVICE COMPANY
FORM OF UTILITY SERVICE AGREEMENT
SERVICE AGREEMENT
This Service Agreement is made and entered into this day of
-----
, by and between ("Client Company") and CP&L
- ----------- ------------------
Services ("Service Company").
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the business
of Service Company, in accordance herewith, as a wholly-owned subsidiary service
company of CP&L Energy, Inc. ("CP&L Energy"); and
WHEREAS, Client Company is a utility operating company subsidiary of CP&L
Energy and an associate of Service Company; and
WHEREAS, Service Company and Client Company have entered into this Service
Agreement whereby Service Company agrees to provide and Client Company agrees to
accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Service Company to fairly and equitably allocate costs among all
associate companies to which it renders services (collectively, the "Client
Companies"), including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods and
in such manner as Client Company may from time to time request and that Service
Company concludes it is able to perform. Service Company shall also provide
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by Client Company and that
Service Company concludes it is able to perform. In supplying such services,
Service Company may arrange, where it deems appropriate, for the services of
such experts, consultants, advisers, and other persons with necessary
qualifications as are required for or pertinent to the provision of such
services.
1
<PAGE>
Section 1.2 Client Company shall take from Service Company such of the
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time by
Client Company and that Service Company concludes it is able to perform.
Section 1.3 The cost of the services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend or alter any activity,
project, program or work order provided that (i) any such amendment or
alteration that results in a material change in the scope of the services to be
performed or equipment to be provided is agreed to by Service Company, (ii) the
cost for the services covered by the activity, project, program or work order
shall include any expense incurred by Service Company as a direct result of such
amendment or alteration of the activity, project, program or work order, and
(iii) no amendment or alteration of an activity, project, program or work order
shall release Client Company from liability for all costs already incurred by or
contracted for by Service Company pursuant to the activity, project, program or
work order, regardless of whether the services associated with such costs have
been completed.
Section 1.4 Service Company shall use its best efforts to maintain a staff
trained and experienced in the services described in Appendix A.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Service Company all costs, which reasonably can be
identified and related to particular services performed by Service Company for
or on its behalf. The methods for assigning or allocating Service Company costs
to Client Company, as well as to other associate companies, are set forth in
Appendix A.
Section 2.2 It is the intent of this Service Agreement that charges for
services shall be distributed among Client Companies, to the extent possible,
based upon direct assignment. The amounts remaining after direct assignment
shall be allocated among the Client Companies using the methods identified in
Appendix A. The method of assignment or allocation of cost shall be subject to
review annually, or more frequently if appropriate. Such method of assignment or
allocation of costs may be modified or changed by the Service Company without
the necessity of an amendment to this Service Agreement; provided that, in each
instance, all services rendered hereunder shall be at actual cost thereof,
fairly and equitably assigned or allocated, all in accordance with the
requirements of the Act and any orders promulgated thereunder. The Service
Company shall review with the Client Company any proposed material change in the
method of assignment or allocation of costs hereunder and the parties must agree
to any such changes before they are implemented. In addition, no such agreed
upon material change shall be made unless and until the Service Company shall
have first given written notice to the North Carolina Utilities Commission, the
Public Service Commission of South Carolina, and the Florida Public Service
Commission (collectively, the "State Commissions") and the SEC not less than 60
days prior to the proposed effective date thereof.
2
<PAGE>
Section 2.3 Service Company shall render a monthly report to Client
Company that shall reflect the information necessary to identify the costs
charged for that month. Client Company shall remit to Service Company all
charges billed to it within 30 days of receipt of the monthly report.
Section 2.4 It is the intent of this Service Agreement that the payment
for services rendered by Service Company to Client Company under this Service
Agreement shall cover all the costs of its doing business including, but not
limited to, salaries and wages, office supplies and expenses, outside services
employed, property insurance, injuries and damages, employee pensions and
benefits, miscellaneous general expenses, rents, maintenance of structures and
equipment, depreciation and amortization, and compensation for use of capital as
permitted by Rule 91 of the SEC's regulations under the Act.
Section 2.5 North and South Carolina Client Companies may not incur a
charge under this Service Agreement except in accordance with North and South
Carolina law and the rules, regulations and orders of the North Carolina
Utilities Commission ("NCUC") and South Carolina Public Service Commission
("SCPSC") promulgated thereunder, and may not seek to reflect in rates any cost
incurred under this agreement exceeding the amount allowed by the NCUC or SCPSC.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective as of the date
first written above, subject only to the receipt of any required regulatory
approvals from the State Commissions and the SEC, and shall continue in force
until terminated by Service Company or Client Company, upon not less than one
year's prior written notice to the other party. This Service Agreement shall
also be subject to termination or modification at any time, without notice, if
and to the extent performance under this Service Agreement may conflict with the
Act or with any rule, regulation or order of the SEC adopted before or after the
date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of Service Company shall be kept in
accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after the
date hereof.
Section 4.2 New direct or indirect subsidiaries of CP&L Energy, which may
come into existence after the effective date of this Service Agreement, may
become additional client companies of Service Company and subject to a service
agreement with Service Company. The parties hereto shall make such changes in
the scope and character of the services to be rendered and the method of
assigning, distributing or allocating costs of such services as specified in
Appendix A, subject to the requirements of Section 2.2, as may become necessary
3
<PAGE>
to achieve a fair and equitable assignment, distribution, or allocation of
Service Company costs among all associate companies including the new
subsidiaries.
Section 4.3 Service Company shall permit Client Company access to its
accounts and records including the basis and computation of allocations.
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
CP&L SERVICES
BY:
-------------------------------------
Name:
Title:
CLIENT COMPANY
BY:
-------------------------------------
Name:
Title:
The undersigned requests all services listed in Appendix A from CP&L Services,
except for . Services will begin .
--------------------------- -------------------
CLIENT COMPANY
BY:
-------------------------------------
Name:
Title:
4
<PAGE>
APPENDIX A
DESCRIPTION OF SERVICES TO BE PROVIDED BY SERVICE COMPANY AND
DETERMINATION OF CHARGES FOR SUCH SERVICES TO THE
CLIENT COMPANIES
TO BE FILED BY AMENDMENT
5
EXHIBIT B-3
SERVICE COMPANY
FORM OF NON-UTILITY SERVICE AGREEMENT
SERVICE AGREEMENT
This Service Agreement is made and entered into this day of
-----
, by and between ("Client Company") and CP&L
- ----------- ------------------
Services ("Service Company").
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the business
of Service Company, in accordance herewith, as a wholly-owned subsidiary service
company of CP&L Energy, Inc. ("CP&L Energy"); and
WHEREAS, Client Company is a non-utility company subsidiary of CP&L Energy
and an associate of Service Company; and
WHEREAS, Service Company and Client Company have entered into this Service
Agreement whereby Service Company agrees to provide and Client Company agrees to
accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Service Company to fairly and equitably allocate costs among all
associate companies to which it renders services (collectively, the "Client
Companies"), including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods and
in such manner as Client Company may from time to time request and that Service
Company concludes it is able to perform. Service Company shall also provide
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by Client Company and that
Service Company concludes it is able to perform. In supplying such services,
Service Company may arrange, where it deems appropriate, for the services of
such experts, consultants, advisers, and other persons with necessary
qualifications as are required for or pertinent to the provision of such
services.
1
<PAGE>
Section 1.2 Client Company shall take from Service Company such of the
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time by
Client Company and that Service Company concludes it is able to perform.
Section 1.3 The cost of the services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend or alter any activity,
project, program or work order provided that (i) any such amendment or
alteration that results in a material change in the scope of the services to be
performed or equipment to be provided is agreed to by Service Company, (ii) the
cost for the services covered by the activity, project, program or work order
shall include any expense incurred by Service Company as a direct result of such
amendment or alteration of the activity, project, program or work order, and
(iii) no amendment or alteration of an activity, project, program or work order
shall release Client Company from liability for all costs already incurred by or
contracted for by Service Company pursuant to the activity, project, program or
work order, regardless of whether the services associated with such costs have
been completed.
Section 1.4 Service Company shall use its best efforts to maintain a staff
trained and experienced in the services described in Appendix A.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Service Company all costs, which reasonably can be
identified and related to particular services performed by Service Company for
or on its behalf. The methods for assigning or allocating Service Company costs
to Client Company, as well as to other associate companies, are set forth in
Appendix A.
Section 2.2 It is the intent of this Service Agreement that charges for
services shall be distributed among Client Companies, to the extent possible,
based upon direct assignment. The amounts remaining after direct assignment
shall be allocated among the Client Companies using the methods identified in
Appendix A. The method of assignment or allocation of cost shall be subject to
review annually, or more frequently if appropriate. Such method of assignment or
allocation of costs may be modified or changed by the Service Company without
the necessity of an amendment to this Service Agreement; provided that, in each
instance, all services rendered hereunder shall be at actual cost thereof,
fairly and equitably assigned or allocated, all in accordance with the
requirements of the Act and any orders promulgated thereunder. The Service
Company shall review with the Client Company any proposed material change in the
method of assignment or allocation of costs hereunder and the parties must agree
to any such changes before they are implemented. In addition, no such agreed
upon material change shall be made unless and until the Service Company shall
have first given written notice to the SEC not less than 60 days prior to the
proposed effective date thereof.
2
<PAGE>
Section 2.3 Service Company shall render a monthly report to Client
Company that shall reflect the information necessary to identify the costs
charged for that month. Client Company shall remit to Service Company all
charges billed to it within 30 days of receipt of the monthly report.
Section 2.4 It is the intent of this Service Agreement that the payment
for services rendered by Service Company to Client Company under this Service
Agreement shall cover all the costs of its doing business including, but not
limited to, salaries and wages, office supplies and expenses, outside services
employed, property insurance, injuries and damages, employee pensions and
benefits, miscellaneous general expenses, rents, maintenance of structures and
equipment, depreciation and amortization, and compensation for use of capital as
permitted by Rule 91 of the SEC's regulations under the Act.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective as of the date
first written above, subject only to the receipt of any required regulatory
approvals from the SEC, and shall continue in force until terminated by Service
Company or Client Company, upon not less than one year's prior written notice to
the other party. This Service Agreement shall also be subject to termination or
modification at any time, without notice, if and to the extent performance under
this Service Agreement may conflict with the Act or with any rule, regulation or
order of the SEC adopted before or after the date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of Service Company shall be kept in
accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after the
date hereof.
Section 4.2 New direct or indirect subsidiaries of CP&L Energy, which may
come into existence after the effective date of this Service Agreement, may
become additional client companies of Service Company and subject to a service
agreement with Service Company. The parties hereto shall make such changes in
the scope and character of the services to be rendered and the method of
assigning, distributing or allocating costs of such services as specified in
Appendix A, subject to the requirements of Section 2.2, as may become necessary
to achieve a fair and equitable assignment, distribution, or allocation of
Service Company costs among all associate companies including the new
subsidiaries.
Section 4.3 Service Company shall permit Client Company access to its
accounts and records including the basis and computation of allocations.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
CP&L SERVICES
BY:
-------------------------------------
Name:
Title:
CLIENT COMPANY
BY:
-------------------------------------
Name:
Title:
The undersigned requests all services listed in Appendix A from CP&L Services,
except for . Services will begin .
----------------------- -----------------------
CLIENT COMPANY
BY:
-------------------------------------
Name:
Title:
4
<PAGE>
APPENDIX A
DESCRIPTION OF SERVICES TO BE PROVIDED BY SERVICE COMPANY AND
DETERMINATION OF CHARGES FOR SUCH SERVICES TO THE
CLIENT COMPANIES
TO BE FILED BY AMENDMENT
5
EXHIBIT B-4
UTILITY COMPANY
FORM OF ASSOCIATE SERVICE AGREEMENT
SERVICE AGREEMENT
This Service Agreement is made and entered into this day of
-----
, by and between ("Client Company") and
- ----------- ------------------
("Utility Company").
- -------------------
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC"), pursuant to
Section 13(b) of the Public Utility Holding Company Act of 1935 ("Act") has
authorized Utility Company to provide certain services to its associate
companies within the CP&L Energy system; and
WHEREAS, Client Company is an associate company within the CP&L Energy
system; and
WHEREAS, Utility Company and Client Company have entered into this Service
Agreement whereby Utility Company agrees to provide and Client Company agrees to
accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Utility Company to fairly and equitably allocate costs among all
associate companies to which it renders services (collectively, the "Client
Companies"), including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 Utility Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods and
in such manner as Client Company may from time to time request and that Utility
Company concludes it is able to perform. Utility Company shall also provide
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by Client Company and that
Utility Company concludes it is able to perform. In supplying such services,
Utility Company may arrange, where it deems appropriate, for the services of
such experts, consultants, advisers, and other persons with necessary
qualifications as are required for or pertinent to the provision of such
services.
1
<PAGE>
Section 1.2 Client Company shall take from Utility Company such of the
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time by
Client Company and that Utility Company concludes it is able to perform.
Section 1.3 The cost of the services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend or alter any activity,
project, program or work order provided that (i) any such amendment or
alteration that results in a material change in the scope of the services to be
performed or equipment to be provided is agreed to by Utility Company, (ii) the
cost for the services covered by the activity, project, program or work order
shall include any expense incurred by Utility Company as a direct result of such
amendment or alteration of the activity, project, program or work order, and
(iii) no amendment or alteration of an activity, project, program or work order
shall release Client Company from liability for all costs already incurred by or
contracted for by Utility Company pursuant to the activity, project, program or
work order, regardless of whether the services associated with such costs have
been completed.
Section 1.4 Utility Company shall use its best efforts to maintain a staff
trained and experienced in the services described in Appendix A.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Utility Company all costs, which reasonably can be
identified and related to particular services performed by Utility Company for
or on its behalf. The methods for assigning or allocating Utility Company costs
to Client Company, as well as to other associate companies, are set forth in
Appendix A.
Section 2.2 It is the intent of this Service Agreement that charges for
services shall be distributed among Client Companies, to the extent possible,
based upon direct assignment. The amounts remaining after direct assignment
shall be allocated among the Client Companies using the methods identified in
Appendix A. The method of assignment or allocation of cost shall be subject to
review annually, or more frequently if appropriate. Such method of assignment or
allocation of costs may be modified or changed by the Utility Company without
the necessity of an amendment to this Service Agreement; provided that, in each
instance, all services rendered hereunder shall be at actual cost thereof,
fairly and equitably assigned or allocated, all in accordance with the
requirements of the Act and any orders promulgated thereunder. The Utility
Company shall review with the Client Company any proposed material change in the
method of assignment or allocation of costs hereunder and the parties must agree
to any such changes before they are implemented. In addition, no such agreed
upon material change shall be made unless and until the Utility Company shall
have first given written notice to the North Carolina Utilities Commission, the
Public Service Commission of South Carolina, and the Florida Public Service
Commission (collectively, the "State Commissions") and the SEC not less than 60
days prior to the proposed effective date thereof.
2
<PAGE>
Section 2.3 Utility Company shall render a monthly report to Client
Company that shall reflect the information necessary to identify the costs
charged for that month. Client Company shall remit to Utility Company all
charges billed to it within 30 days of receipt of the monthly report.
Section 2.4 It is the intent of this Service Agreement that the payment
for services rendered by Utility Company to Client Company under this Service
Agreement shall cover all the costs of its doing business including, but not
limited to, salaries and wages, office supplies and expenses, outside services
employed, property insurance, injuries and damages, employee pensions and
benefits, miscellaneous general expenses, rents, maintenance of structures and
equipment, depreciation and amortization, and compensation for use of capital as
permitted by Rule 91 of the SEC's regulations under the Act.
Section 2.5 North and South Carolina Utility Companies may not make a
charge under this Service Agreement except in accordance with North and South
Carolina law and the rules, regulations and orders of the North Carolina
Utilities Commission ("NCUC") and South Carolina Public Service Commission
(SCPSC") promulgated thereunder, and may not seek to reflect in rates any
revenue level earned under this agreement less than the amount imputed by the
NCUC or SCPSC.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective as of the date
first written above, subject only to the receipt of any required regulatory
approvals from the State Commissions and the SEC, and shall continue in force
until terminated by Utility Company or Client Company, upon not less than one
year's prior written notice to the other party. This Service Agreement shall
also be subject to termination or modification at any time, without notice, if
and to the extent performance under this Service Agreement may conflict with the
Act or with any rule, regulation or order of the SEC adopted before or after the
date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of Utility Company shall be kept in
accordance with the General Rules and Regulations promulgated by the FERC.
Section 4.2 New direct or indirect subsidiaries of CP&L Energy, which may
come into existence after the effective date of this Service Agreement, may
become additional client companies of Utility Company and subject to a service
agreement with Utility Company. The parties hereto shall make such changes in
the scope and character of the services to be rendered and the method of
assigning, distributing or allocating costs of such services as specified in
Appendix A, subject to the requirements of Section 2.2, as may become necessary
to achieve a fair and equitable assignment, distribution, or allocation of
Utility Company costs among all associate companies including the new
subsidiaries.
3
<PAGE>
Section 4.3 Utility Company shall permit Client Company access to its
accounts and records including the basis and computation of allocations.
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
UTILITY COMPANY
BY:
-------------------------------------
Name:
Title:
CLIENT COMPANY
BY:
-------------------------------------
Name:
Title:
The undersigned requests all services listed in Appendix A from Utility Company,
except for . Services will begin .
----------------------- -----------------------
CLIENT COMPANY
BY:
-------------------------------------
Name:
Title:
4
<PAGE>
APPENDIX A
DESCRIPTION OF SERVICES TO BE PROVIDED BY UTILITY COMPANY AND
DETERMINATION OF CHARGES FOR SUCH SERVICES TO THE
CLIENT COMPANIES
TO BE FILED BY AMENDMENT
5
Exhibit No. CF-1201
SYSTEM INTEGRATION AGREEMENT
BETWEEN
CAROLINA POWER & LIGHT COMPANY
AND
FLORIDA POWER CORPORATION
<PAGE>
SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE i
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TABLE OF CONTENTS
ARTICLE I Definitions........................................................2
1.1 Agent............................................................2
1.2 Agreement........................................................2
1.3 Combined System..................................................2
1.4 Control Area.....................................................2
1.5 CP&L.............................................................2
1.6 CP&L East Control Area...........................................2
1.7 CP&L West Control Area...........................................3
1.8 Decremental Cost.................................................3
1.9 Exchange.........................................................3
1.10 Exchange Agreement...............................................3
1.11 FERC.............................................................3
1.12 FPC..............................................................3
1.13 FPC Control Area.................................................3
1.14 Generating Resource..............................................3
1.15 Holdings.........................................................3
1.16 Incremental Cost.................................................4
1.17 Industry Standards...............................................4
1.18 Interconnection Constraints......................................4
1.19 Party or Parties.................................................4
1.20 Progress.........................................................4
1.21 Native Load Customer.............................................4
1.22 Off-System Purchases.............................................4
1.23 Off-System Sales.................................................5
1.24 Operating Committee..............................................5
1.25 Service Schedules................................................5
1.26 System Emergency.................................................5
1.27 Trading and Marketing Activities.................................5
1.28 Trading and Market Realization...................................5
ARTICLE II Term Of Agreement.................................................5
2.1 Term.............................................................5
2.2 Periodic Review..................................................6
ARTICLE III Objectives.......................................................6
3.1 Purpose..........................................................6
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ARTICLE IV Relationship To Other Agreements And Services.....................6
4.1 Scope............................................................6
ARTICLE V Agent..............................................................7
5.1 Agent's Functions................................................7
5.2 Coordinating with Operating Committee............................8
ARTICLE VI Composition And Duties Of The Operating Committee.................9
6.1 Operating Committee..............................................9
6.2 Meeting Dates....................................................9
6.3 Decisions........................................................9
6.4 Duties...........................................................9
ARTICLE VII Coordinated Planning And Operation..............................10
7.1 Coordinated System Planning.....................................10
7.2 Combined System Dispatch........................................11
7.3 Capacity Exchange...............................................12
7.4 Energy Exchange.................................................13
7.5 Emergency Response..............................................13
ARTICLE VIII Trading And Marketing..........................................13
8.1 Centralized Trading and Marketing Activities....................13
8.2 Coordination with Agent.........................................14
ARTICLE IX Assignment Of Costs And Benefits Of Coordinated Operations.......14
9.1 Administrative Costs............................................14
9.2 Service Schedules...............................................14
ARTICLE X Billing Procedures................................................15
10.1 Records.........................................................15
10.2 Monthly Statements..............................................15
10.3 Billings and Payments...........................................16
10.4 Taxes...........................................................16
ARTICLE XI Force Majeure....................................................16
11.1 Events Excusing Performance.....................................16
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ARTICLE XII Industry Standards..............................................17
12.1 Adherence to Reliability Criteria...............................17
ARTICLE XIII General........................................................17
13.1 No Third Party Beneficiaries....................................17
13.2 Waivers.........................................................18
13.3 Successors and Assigns..........................................18
13.4 Liability and Indemnification...................................18
13.5 Section Headings................................................19
13.6 Notice..........................................................19
ARTICLE XIV Regulatory Approval.............................................19
14.1 Regulatory Authorization........................................19
14.2 Changes.........................................................20
SERVICE SCHEDULE A ALLOCATION OF CAPACITY COSTS AND
PURCHASED POWER COSTS..................................................A-1
SERVICE SCHEDULE B PRICING FOR SYSTEM CAPACITY AND
ASSOCIATED ENERGY EXCHANGES............................................B-1
SERVICE SCHEDULE C PRICING FOR SYSTEM ENERGY EXCHANGES.....................C-1
SERVICE SCHEDULE D ALLOCATION OF TRADING AND MARKETING
REALIZATIONS...........................................................D-1
<PAGE>
SYSTEM INTEGRATION AGREEMENT
BETWEEN
CAROLINA POWER & LIGHT COMPANY
AND
FLORIDA POWER CORPORATION
THIS SYSTEM INTEGRATION AGREEMENT ("Agreement") is made and entered
into as of the ___ day of __________, 2000 by and between Carolina Power & Light
Company ("CP&L"), a North Carolina corporation, and Florida Power Corporation
("FPC"), a Florida corporation. CP&L and FPC are referred to herein collectively
as the "Parties" and individually as a "Party."
WHEREAS, CP&L and FPC each owns and operates electric generation,
transmission and distribution facilities with which it is engaged in the
business of generating, transmitting and selling electric power and energy to
the general public and to other electric utilities; and
WHEREAS, Florida Progress Corporation, the parent company of FPC
("Progress"), CP&L and CP&L Holdings, Inc. ("Holdings"), an affiliate of CP&L,
have entered into an Agreement and Plan of Exchange dated August 22, 1999 (the
"Exchange Agreement"); and
WHEREAS, following the effective date of the stock exchange provided
for in the Exchange Agreement (the "Exchange"), Holdings will be the parent
holding company of both CP&L and Progress; and
WHEREAS, following the effective date of the Exchange, both CP&L and
FPC will operate as public utility operating subsidiaries of Holdings; and
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WHEREAS, CP&L and FPC desire to establish a framework under which
their power supply resources will to the extent practicable be planned,
operated, maintained and dispatched on a coordinated basis;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the Parties mutually agree as
follows: ARTICLE I DEFINITIONS
1.1 AGENT means the Parties' designated representative or
representatives for the purposes specified in Section 5.1 and elsewhere in this
Agreement.
1.2 AGREEMENT means this System Integration Agreement, including
all Service Schedules and attachments hereto.
1.3 COMBINED System means the CP&L East Control Area, the CP&L
West Control Area and the FPC Control Area.
1.4 CONTROL AREA means an electric system or systems bounded by
interconnection metering and telemetry, capable of controlling generation to
maintain its interchange schedule with other Control Areas and contributing to
frequency regulation of the interconnection.
1.5 CP&L means Carolina Power & Light Company.
1.6 CP&L EAST CONTROL AREA means the electric generation,
transmission and distribution facilities of CP&L that are operated as a Control
Area in the coastal plain of North Carolina extending to the Atlantic Ocean
between the Pamlico River and the South Carolina border, the lower Piedmont
section of North Carolina and an area of northeastern South Carolina.
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1.7 CP&L WEST CONTROL AREA means the electric generation,
transmission and distribution facilities of CP&L that are operated as a Control
Area in western North Carolina in and around the City of Asheville.
1.8 DECREMENTAL COST means the costs avoided by a Party solely by
reason of its purchase of an incremental amount of energy, such as costs for
fuel, reactant, labor, operation, maintenance, start-up, fuel handling, taxes,
emission allowances, and transmission and ancillary service charges. Such costs
may also include costs that otherwise would have been paid for energy to third
parties where the Party has an existing contractual entitlement to purchase
energy.
1.9 EXCHANGE means the stock exchange contemplated by the
Exchange Agreement.
1.10 EXCHANGE AGREEMENT means the Agreement and Plan of Exchange
dated August 22, 1999 among Progress, CP&L and Holdings.
1.11 FERC means the Federal Energy Regulatory Commission or a
successor agency having jurisdiction over this Agreement.
1.12 FPC means Florida Power Corporation.
1.13 FPC CONTROL AREA means the electric generation, transmission
and distribution facilities of FPC that are operated as a Control Area in
peninsular Florida.
1.14 GENERATING RESOURCE means the electric power generating
facilities or capacity owned by or under contract to a Party or Parties to meet
the capacity and energy needs of the Party or Parties, including Off-System
Sales.
1.15 HOLDINGS means CP&L Holdings, Inc.
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1.16 INCREMENTAL COST means any costs incurred by a Party solely
by reason of its provision of an incremental amount of energy, such as costs for
fuel, reactant, labor, operation, maintenance, start-up, fuel handling, taxes,
emission allowances, and transmission and ancillary service charges and losses.
Such costs may also include costs paid for energy to third parties where the
Party has an existing contractual entitlement to purchase energy.
1.17 INDUSTRY STANDARDS means those principles, guides, criteria,
standards and practices referred to in Section 12.1.
1.18 INTERCONNECTION CONSTRAINTS has the meaning ascribed to that
term in Section 7.2.
1.19 PARTY OR PARTIES means CP&L, FPC or both as the context
warrants.
1.20 PROGRESS means Florida Progress Corporation.
1.21 NATIVE LOAD CUSTOMER for purposes of this Agreement means a
wholesale or retail power customer on whose behalf a Party, by statute,
franchise, regulatory requirement, or firm power supply contract, has undertaken
an obligation to supply electricity to reliably meet the electric needs of such
customer. The term "Native Load Customer" for purposes of this Agreement
excludes customers and that portion of a customer's load served pursuant to
contracts that do not obligate the supplier to install capacity to meet the
customer's load requirements.
1.22 OFF-SYSTEM PURCHASES means purchases from a third party of
energy and/or capacity to reduce costs or to provide reliability for the
Combined System or to engage in Trading and Marketing Activities.
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1.23 OFF-SYSTEM SALES means all sales of power and energy to
non-Native Load Customers of the Parties.
1.24 OPERATING COMMITTEE means the administrative body established
pursuant to Article VI for the purposes therein specified.
1.25 SERVICE SCHEDULES means the Service Schedules attached to
this Agreement and those that later may be agreed to by the Parties and accepted
for filing by the FERC.
1.26 SYSTEM EMERGENCY means a condition which, if not promptly
corrected, threatens to cause imminent harm to persons or property, including
the equipment of a Party or a third party, or threatens the reliability of
electric service provided by a Party to Native Load Customers.
1.27 TRADING AND MARKETING ACTIVITIES means all Off-System Sales
and Off-System Purchases (other than purchases used to serve Native Load
Customers) conducted on behalf of the Parties.
1.28 TRADING AND MARKET REALIZATION means the difference between
(i) revenues collected from Trading and Marketing Activities and (ii) the
Incremental Cost of such Trading and Marketing Activities.
ARTICLE II
TERM OF AGREEMENT
2.1 TERM
Subject to FERC approval or acceptance for filing, this Agreement
shall take effect upon the effective date of the Exchange, and shall continue in
force and effect for a period of five (5) years from the effective date,
continuing thereafter until terminated by mutual agreement or upon twelve (12)
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months' written notice from one Party to the other.
2.2 PERIODIC REVIEW This Agreement will be reviewed periodically
by the Operating Committee to determine whether revisions are necessary or
appropriate.
ARTICLE III
OBJECTIVES
3.1 PURPOSE
The purpose of this Agreement is to provide the contractual basis for
integration of the Combined System, including the coordinated planning,
operation and maintenance of the power supply resources of the Combined System,
to achieve economies consistent with the provision of reliable electric service
and an equitable sharing of the benefits and costs of such coordinated
arrangements.
ARTICLE IV
RELATIONSHIP TO OTHER AGREEMENTS AND SERVICES
4.1 SCOPE
This Agreement is intended to apply in addition to and not in lieu of
any existing tariffs, service agreements or similar commitments of the Parties.
The provisions of this Agreement shall, to the extent practicable, be construed
and applied in a manner that is consistent with such preexisting commitments.
This Agreement is not intended to preclude the Parties from entering into other
arrangements between or among themselves and others. This Agreement applies to
the Generating Resources and loads served by the Parties and does not apply to
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the transmission facilities owned or operated by the Parties. The transactions
contemplated by this Agreement may be subject to and limited from time-to-time
by state and federal laws, or the regulations, rules and orders of applicable
regulatory agencies regarding affiliate transactions.
ARTICLE V
AGENT
5.1 AGENT'S FUNCTIONS
The Operating Committee shall designate an Agent or Agents for the
purposes set forth in this section. Unless the Parties agree otherwise, the
Agent shall be either CP&L or a services company subsidiary of Holdings;
provided, however, that the Operating Committee may in its discretion assign
some of the following agency functions to a services company and others to CP&L
in which event references in this Agreement to the Agent shall be deemed to mean
the entity to which the applicable agency function has been assigned. The agency
functions shall include:
(a) coordinating the planning and design of generation to be
installed by or on behalf of the Parties and the acquisition
and disposition of Generating Resources;
(b) coordinating the operation and maintenance of the Parties'
Generating Resources;
(c) coordinating the economic dispatch of the Parties'
Generating Resources;
(d) coordinating Trading and Marketing Activities;
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SYSTEM INTEGRATION AGREEMENT BETWEEN
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(e) coordinating fuel purchasing and transportation and
treatment of emission allowances;
(f) providing and/or acquiring any additional power supply
services for the loads served and sales made on behalf of
the Parties;
(g) developing bills and billing information between the Parties
pursuant to this Agreement;
(h) conducting other shared services functions on behalf of the
Parties, including but not limited to accounting, audit,
billing, corporate relations, finance, human resources,
information technology, investor relations, legal,
regulatory and strategic planning functions; and
(i) performing such other activities and duties as may be
assigned from time to time by the Operating Committee.
5.2 COORDINATING WITH OPERATING COMMITTEE
Except as expressly established otherwise in this Agreement, the Agent
shall perform each of the duties listed in Section 5.1 in consultation with the
Operating Committee. With the prior written consent of the Operating Committee,
the Agent may delegate all or a part of its responsibilities under this
Agreement to another entity.
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ARTICLE VI
COMPOSITION AND DUTIES OF THE OPERATING COMMITTEE
6.1 OPERATING COMMITTEE
The Operating Committee is the administrative body created to
administer this Agreement and shall consist of three (3) members. One member
shall be a representative of CP&L, one member shall be a representative of FPC
and the third member shall be a representative of the services company
subsidiary of Holdings.
6.2 MEETING DATES
The Operating Committee shall hold meetings at such times, means and
places as the members shall determine from time to time. Minutes of each
Operating Committee meeting shall be prepared and maintained.
6.3 DECISIONS
All decisions of the Operating Committee shall be by a majority vote
of the members present or voting by proxy at the meeting at which the vote is
taken. As necessary, recommendations will be made to such officers and directors
of the Parties as may be appropriate.
6.4 DUTIES
The Operating Committee shall have the following duties, unless such
duties are otherwise assigned by a vote of the Operating Committee to the Agent,
in which case the Agent shall perform such duties. The Operating Committee will
be responsible for:
(a) administering this Agreement and recommending any amendments
hereto, including such amendments which could result from a
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change in regulatory requirements applicable to a Party or
its Generating Resources;
(b) overseeing operation of the Parties' Generating Resources;
(c) reviewing and making recommendations concerning the
proportional sharing of costs and benefits under this
Agreement;
(d) reviewing and, if necessary, amending the duties and
responsibilities of the Agent;
(e) evaluating and making recommendations concerning capacity
additions; and
(f) ensuring coordination for other matters not specifically
provided for herein that the Operating Committee considers
necessary to operate the Parties' Generating Resources
reliably and economically.
ARTICLE VII
COORDINATED PLANNING AND OPERATION
7.1 COORDINATED SYSTEM PLANNING
The Agent, under the direction of the Operating Committee, will on an
annual basis, or more frequently if circumstances dictate, assess the adequacy
of the Parties' Generating Resources from the perspective of each Party and of
the Combined System, taking into account applicable Industry Standards, the
reserve requirements of each applicable state and region, state integrated
resource plans, load forecasts, changing regulatory structures and requirements
and all other criteria applicable by law or regulation to each Party, and will
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make a recommendation whether to install or acquire additional Generating
Resources.
In making this evaluation, the Agent will assess whether economies and
efficiencies may be achieved by selecting common Generating Resources for both
Parties, subject to regulatory, transmission, economic and operational
constraints. Moreover, the Agent will determine whether a Party's resource needs
could be met by the sale of capacity and/or energy on a temporary basis pursuant
to a Service Schedule under this Agreement or by purchase from a non-affiliated
third party.
The Operating Committee based on the Agent's evaluation will decide
whether to add Generating Resources for the benefit of more than one Party. If
it decides to add such resources, the costs associated with such resources will
be allocated to the Parties in proportion to their need for such resources. Such
allocation shall be set forth in a separate agreement or Service Schedule which
shall be subject to any necessary FERC authorization and other required
regulatory approvals.
Notwithstanding any of the foregoing, the actual addition or
disposition of Generating Resources will be conditioned upon compliance with all
applicable legal and regulatory requirements; in no event will the Operating
Committee or Agent acquire, assign, reassign or dispose of Generating Resources
for a Party in contravention of such requirements.
7.2 COMBINED SYSTEM DISPATCH
The Parties will from time to time assess the feasibility and
practicability of consolidating the Control Area functions of the CP&L East
Control Area, the CP&L West Control Area and the FPC Control Area; provided
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that, whether operating as separate or consolidated Control Areas, the Parties'
Generating Resources will be dispatched on a coordinated basis. Except as
provided in this Agreement, the pre-Exchange dispatch priorities and methods
applicable within each Control Area shall continue to apply to that Control Area
so as to preserve the relative dispatch obligations of each Party. The
coordinated dispatch of the Parties' Generating Resources will be conducted on a
least-cost basis subject to limitations on the availability of transmission
entitlements linking the Control Areas (such availability limitations being
referred to hereinafter as the "Interconnection Constraints").
Subject to the Interconnection Constraints, day-ahead unit commitment
will be centrally performed with reference to the Combined System's obligations,
taking into account the specific obligations within each Control Area. The
Control Areas will be dispatched in real time to minimize total generation costs
within the applicable Control Area.
7.3 CAPACITY EXCHANGE
Whenever a Party has capacity available for sale and the other Party
desires to purchase capacity, the Agent shall evaluate the feasibility of a
capacity transaction between the Parties. Such evaluation shall take into
account the Interconnection Constraints, state resource procurement policies and
alternative opportunities for sales and purchases. Transactions for one year or
less shall be arranged under Service Schedule B. The terms of transactions of
longer duration shall be set out in separate agreements or Service Schedules,
which shall be subject to any necessary FERC authorization. Notwithstanding the
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foregoing, a Party will not enter into an arrangement to sell capacity to the
other Party if at the time of making the arrangement, such sale would preclude a
sale of capacity to a third party that would be of greater financial value to
the seller, or the purchasing Party could acquire capacity of comparable amount,
duration and firmness from a third party at lesser cost.
7.4 ENERGY EXCHANGE
Either Party may make energy available from its Generating Resources
to the other Party for the purposes and to the extent required by this
Agreement.
7.5 EMERGENCY RESPONSE
In the event of a System Emergency, no adverse distinction shall be
made between the Native Load Customers of CP&L and those of FPC. Each Party
shall, when so instructed by the Agent, make its Generating Resources available
in response to a System Emergency. Notwithstanding the foregoing, it is
understood that the Interconnection Constraints may limit the ability of one
Party to respond to a System Emergency of the other Party, and that neither
Party is required by this Agreement to curtail or interrupt firm service to its
own Native Load Customers.
ARTICLE VIII
TRADING AND MARKETING
8.1 CENTRALIZED TRADING AND MARKETING ACTIVITIES
Trading and Marketing Activities initiated or concluded after the
effective date of this Agreement shall be coordinated by or at the direction of
the Agent.
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8.2 COORDINATION WITH AGENT
Subject to compliance with applicable codes of conduct, the Parties
shall promptly communicate any potential Trading and Marketing Activities to the
Agent and shall cooperate in evaluating and facilitating such transactions as
are determined by the Agent to be in the interest of the Parties.
ARTICLE IX
ASSIGNMENT OF COSTS AND BENEFITS OF COORDINATED OPERATIONS
9.1 ADMINISTRATIVE COSTS
Costs incurred by the Agent and the Operating Committee to administer
this Agreement shall be borne in equal shares by the Parties unless otherwise
provided by mutual agreement.
9.2 SERVICE SCHEDULES
Except as provided in Section 9.1, the costs and revenues associated
with coordinated operations as described in Articles VII and VIII shall be
distributed in the manner provided from time to time in Service Schedules
attached to and incorporated by reference into this Agreement or by separate
agreement as specified in Article VII. It is understood and agreed that the
Service Schedules are intended to establish an equitable sharing of costs and/or
benefits between the Parties, and that circumstances may, from time to time,
require a reassessment of relative benefits and burdens or of the methods used
in the Service Schedules to apportion the benefits and burdens. Upon a
recommendation of the Operating Committee and agreement between the Parties, any
of the Service Schedules may be amended as of any date agreed to by the Parties,
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subject to receipt of necessary regulatory authorization.
The initial Service Schedules incorporated into this Agreement are as
follows:
SCHEDULE A: Allocation of Capacity Costs and Purchased
----------
Power Costs;
SCHEDULE B: Pricing for System Capacity and Associated
----------
Energy Exchanges;
SCHEDULE C: Pricing for System Energy Exchanges; and
----------
SCHEDULE D Allocation of Trading and Marketing Realizations.
----------
ARTICLE X
BILLING PROCEDURES
10.1 RECORDS
The Agent shall maintain such records as may be necessary to determine
the assignment of costs and benefits of coordinated operations pursuant to this
Agreement. Such records shall be made available to the Parties upon request.
10.2 MONTHLY STATEMENTS
As promptly as practicable after the end of each calendar month, the
Agent shall prepare a statement setting forth the monthly summary of costs and
revenues allocated or assigned to the Parties in sufficient detail as may be
needed for settlements under the provisions of this Agreement. As required, the
Agent may provide such statements on an estimated basis and subsequently adjust
those statements for actual results.
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10.3 BILLINGS AND PAYMENTS
The Agent shall handle all billing between the Parties and other
entities with which they engage in Trading and Marketing Activities pursuant to
this Agreement. Payment between the Parties shall be by making remittance of the
net amount billed or by making appropriate accounting entries on the books of
the Parties.
10.4 TAXES
Should any federal, state, or local tax, surcharge or similar
assessment, in addition to those that may now exist, be levied upon the electric
capacity, energy or service to be provided in connection with this Agreement, or
upon the provider of service as measured by the electric capacity, energy or
service, or the revenue therefrom, such additional amount shall be included in
the net billing as described in Section 10.3.
ARTICLE XI
FORCE MAJEURE
11.1 EVENTS EXCUSING PERFORMANCE
Neither Party shall be liable to the other Party for or on account of
any loss, damage, injury, or expense resulting from or arising out of a delay or
failure to perform, either in whole or in part, any of the agreements, covenants
or obligations made by or imposed upon the Parties by this Agreement, by reason
of or through strike, work stoppage of labor, failure of contractors or
suppliers of materials (including fuel), failure of equipment, environmental
restrictions, riot, fire, flood, ice, invasions, civil war, commotion,
insurrection, military or usurped power, order of any court granted in any bona
fide adverse legal proceedings or action, or of any civil or military authority
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SYSTEM INTEGRATION AGREEMENT BETWEEN
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PAGE 17
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either de facto or de jure, explosion, Act of God or the public enemies, or any
other cause reasonably beyond its control and not attributable to its neglect. A
Party experiencing such a delay or failure to perform shall use due diligence to
remove the cause or causes thereof; provided, however, that neither Party shall
be required to add to, modify or upgrade any facilities, or to settle a strike
or labor dispute except when, according to its own best judgment, such action is
advisable.
ARTICLE XII
INDUSTRY STANDARDS
12.1 ADHERENCE TO RELIABILITY CRITERIA
The Parties agree to conform to all applicable national and regional
electric reliability council principles, guides, criteria, and standards and
industry standard practices (collectively, "Industry Standards") as they affect
the implementation of this Agreement.
ARTICLE XIII
GENERAL
13.1 NO THIRD PARTY BENEFICIARIES
This Agreement does not create rights of any character whatsoever in
favor of any person, corporation, association, entity or power supplier, other
than the Parties, and the obligations herein assumed by the Parties are solely
for the use and benefit of said Parties. Nothing in this Agreement shall be
construed as permitting or vesting, or attempting to permit or vest, in any
person, corporation, association, entity or power supplier, other than the
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SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE 18
- --------------------------------------------------------------------------------
Parties, any rights hereunder or in any of the resources or facilities owned or
controlled by the Parties or the use thereof.
13.2 WAIVERS
Any waiver at any time by a Party of its rights with respect to a
default under this Agreement, or with respect to any other matter arising in
connection with this Agreement, shall not be deemed a waiver with respect to any
subsequent default or matter. Any delay, short of the statutory period of
limitation, in asserting or enforcing any right under this Agreement, shall not
be deemed a waiver of such right.
13.3 SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and be binding upon the
Parties only, and their respective successors and assigns, and shall not be
assignable by either Party without the written consent of the other Party except
to a successor in the operation of its properties by reason of a merger,
consolidation, sale or foreclosure whereby substantially all such properties are
acquired by or merged with those of such a successor.
13.4 LIABILITY AND INDEMNIFICATION
Subject to any applicable state or federal law which may specifically
restrict limitations on liability, each Party shall release, indemnify, and hold
harmless the other Party, its directors, officers and employees from and against
any and all liability for loss, damage or expense alleged to arise from, or
incidental to, injury to persons and/or damage to property in connection with
its facilities or the production or transmission of electric energy by or
through such facilities, or related to performance or non-performance of this
Agreement, including any negligence arising hereunder. In no event shall either
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SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE 19
- --------------------------------------------------------------------------------
Party be liable to the other Party for any indirect, special, incidental or
consequential damages with respect to any claim arising out of this Agreement.
13.5 SECTION HEADINGS
The descriptive headings the Articles and Sections of this Agreement
are used for convenience only, and shall not modify or restrict any of the terms
and provisions thereof.
13.6 NOTICE
Any notice or demand for performance required or permitted under any
of the provisions of this Agreement shall be deemed to have been given on the
date such notice, in writing, is deposited in the U.S. mail, postage prepaid,
certified or registered mail, addressed to:
R. Erik Hansen
Vice President,
System Planning and Operations
Carolina Power & Light Company
411 Fayetteville Street
Raleigh, North Carolina 27601
Telephone: (919) 546-7565
Facsimile: (919) 546-7558
or in such other form or to such other address as the Parties may stipulate.
ARTICLE XIV
REGULATORY APPROVAL
14.1 REGULATORY AUTHORIZATION
This Agreement is subject to and conditioned upon acceptance for
filing without material condition or modification by the FERC. In the event that
this Agreement is not so accepted for filing in its entirety or the FERC
subsequently modifies this Agreement upon complaint or upon its own initiative,
<PAGE>
SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE 20
- --------------------------------------------------------------------------------
either Party may notwithstanding the notice provisions in Section 2.1, terminate
this Agreement immediately upon written notice to the other Party.
14.2 CHANGES
It is contemplated by the Parties that it may be appropriate from time
to time to change, amend, modify or supplement this Agreement, including the
Service Schedules and any other attachments that may be made a part of this
Agreement, to reflect changes in operating practices or costs of operations or
for other reasons. Any such changes to this Agreement shall be in writing
executed by the Parties, subject to necessary regulatory authorizations.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and attested by their duly authorized officers on the day and year
first above written.
CAROLINA POWER & LIGHT COMPANY
By:
------------------------------------
Title:
------------------------------------
FLORIDA POWER CORPORATION
By:
------------------------------------
Title:
------------------------------------
<PAGE>
SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE A-1
- --------------------------------------------------------------------------------
SERVICE SCHEDULE A
ALLOCATION OF CAPACITY COSTS
AND PURCHASED POWER COSTS
A1 - DURATION
- -------------
This Service Schedule A shall become effective and binding when the
System Integration Agreement becomes effective, and shall continue in full force
and effect throughout the duration of such Agreement, except as provided in
Sections 9.1 and 14.2 of the Agreement. This Service Schedule A is a part of the
Agreement and, as such, the use of terms in this Service Schedule A that are
defined in the Agreement shall have the same meanings as set forth in the
Agreement.
A2 - CAPACITY COSTS
- -------------------
CP&L and FPC each shall continue to bear responsibility individually
for all capacity costs related to its respective Generating Resources that were
in commercial operation as of the effective date of the Exchange. Unless
otherwise determined by the Operating Committee, the capacity costs related to
new Generating Resources that have been initiated by a Party but are not yet in
commercial operation as of the effective date of the Exchange also shall be
borne individually by the applicable Party. In the event that the Operating
Committee determines that any of such capacity costs should be allocated between
the Parties, the method of allocation shall be specified in a separate agreement
or Service Schedule which shall be subject to any necessary FERC authorization
and other required regulatory approvals. Similarly, the Operating Committee
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SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE A-2
- --------------------------------------------------------------------------------
shall determine an appropriate assignment or allocation of capacity costs
related to new Generating Resources that have not yet been initiated as of the
effective date of the Exchange. In the event that the Operating Committee
determines that any such capacity costs should be allocated between the Parties,
the method of allocation shall be specified in a separate agreement or Service
Schedule which shall be subject to any necessary FERC authorization.
A3 - PURCHASED POWER COSTS
- ---------------------------
Except in the case of (i) an Off-System Purchase that is allocated by
the Agent to a Trading and Marketing Activity, and (ii) capacity costs assigned
or allocated pursuant to Section A2 above, the cost of purchased power shall be
assigned to the Party that takes physical delivery of the energy.
<PAGE>
SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE B-1
- --------------------------------------------------------------------------------
SERVICE SCHEDULE B
PRICING FOR SYSTEM CAPACITY AND
ASSOCIATED ENERGY EXCHANGES
B1 - DURATION
- -------------
This Service Schedule B shall become effective and binding when the
System Integration Agreement becomes effective, and shall continue in full force
and effect throughout the duration of such Agreement, except as provided in
Sections 9.1 and 14.2 of the Agreement. This Service Schedule B is a part of the
Agreement and, as such, the use of terms in this Service Schedule B that are
defined in the Agreement shall have the same meanings as set forth in the
Agreement.
B2 - APPLICABILITY
- ------------------
Capacity and associated energy made available pursuant to this Service
Schedule B is for a duration of one (1) year or less and for a degree of
firmness agreed to by the Parties. Potential capacity exchanges under this
Service Schedule B will be evaluated in accordance with Section 7.3 of the
Agreement. The selling Party ("Seller") shall be required only to provide up to
the amount of capacity reserved by the purchasing Party ("Purchaser") under this
Service Schedule B. Capacity and associated energy will be provided under this
Service Schedule B at the high side of the Seller's generator step-up
facilities.
B3 - COMPENSATION AND POSTING
- -----------------------------
The prices for capacity and associated energy made available by Seller
under this Service Schedule B shall be the same as the Seller's contemporaneous
prices for capacity and energy of comparable amount, duration and firmness to
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SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE B-2
- --------------------------------------------------------------------------------
non-affiliated entities; provided, however, that such prices may not be lower
than the Seller's system incremental cost over the term of the sale. The prices
offered by the Seller under this Service Schedule B will be offered
contemporaneously for comparable capacity and energy to similarly situated
non-affiliated entities on a publicly available electronic bulletin board. The
prices for all transactions entered into under this Service Schedule B will be
posted contemporaneously on a publicly available electronic bulletin board in
addition to applicable quarterly reporting requirements.
B4 - LIMITATION ON TRANSFERS
- -----------------------------
Capacity and associated energy exchanges under this Service Schedule B
will not be made if the Seller may contemporaneously sell the capacity and
associated energy to a third party at a price greater than the above-stated
Seller's price or the Purchaser may contemporaneously purchase capacity and
associated energy of equivalent amount, duration and firmness from a third party
at a price lower than the above-stated Seller's price. Such market opportunities
are to be evaluated based on actual bids or offers, or actual sales or
purchases, from similar transactions occurring at the time of, or immediately
prior to, the time the decision is made to engage in a sale. The Agent shall
maintain records of such evaluations for a minimum period of one (1) year.
<PAGE>
SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE C-1
- --------------------------------------------------------------------------------
SERVICE SCHEDULE C
PRICING FOR SYSTEM ENERGY EXCHANGES
C1 - DURATION
- -------------
This Service Schedule C shall become effective and binding when the
System Integration Agreement becomes effective, and shall continue in full force
and effect throughout the duration of such Agreement, except as provided in
Sections 9.1 and 14.2 of the Agreement. This Service Schedule C is a part of the
Agreement and, as such, the use of terms in this Service Schedule C that are
defined in the Agreement shall have the same meanings as set forth in the
Agreement.
C2 - APPLICABILITY
- ------------------
This Service Schedule C governs energy exchanges made pursuant to
Section 7.4 of the Agreement, which are sales of energy not associated with
sales of capacity.
C3 - ENERGY TRANSFER PRICES
- ---------------------------
The purchasing Party ("Purchaser") shall pay the selling Party
("Seller") the following amount for energy purchased under this Schedule C
("Transfer Price"):
(1) The Seller's Incremental Costs, plus;
(2) One-half the difference between:
(a) the Purchaser's Decremental Costs; and
(b) the Seller's Incremental Costs.
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SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE C-2
- --------------------------------------------------------------------------------
C4 - LIMITATION ON TRANSFERS
- ----------------------------
Except in a System Emergency, energy exchanges under this Service
Schedule C will not be made available if the Seller may contemporaneously sell
the energy to a third party at a price greater than the Transfer Price or the
Purchaser may contemporaneously purchase energy from a third party at a price
lower than the Transfer Price. Such market opportunities are to be evaluated
based on actual bids or offers, or actual sales or purchases, from similar
transactions occurring at the time of, or immediately prior to, the time the
decision is made to engage in a sale. The Agent shall maintain records of such
evaluations for a minimum period of one (1) year. The Agent shall
contemporaneously post the prices of any energy sales made pursuant to this
Schedule C on a publicly available electronic bulletin board.
<PAGE>
SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE D-1
- --------------------------------------------------------------------------------
SERVICE SCHEDULE D
ALLOCATION OF TRADING AND
MARKETING REALIZATIONS
D1 - DURATION
- -------------
This Service Schedule D shall become effective and binding when the
System Integration Agreement becomes effective, and shall continue in full force
and effect throughout the duration of such Agreement, except as provided in
Sections 9.1 and 14.2 of the Agreement. This Service Schedule D is a part of the
Agreement and, as such, the use of terms in this Service Schedule D that are
defined in the Agreement shall have the same meanings as set forth in the
Agreement.
D2 - ALLOCATION OF TRADING AND MARKETING ACTIVITY COSTS
- -------------------------------------------------------
Each Party shall be reimbursed, before determining Trading and
Marketing Realizations, for its respective Incremental Costs incurred to supply
energy for Trading and Marketing Activities. Costs attributable to Long-Term
(defined for purposes of this Service Schedule D as having a term of more than
one year and having been entered into prior to the effective date of the
Agreement) Off-System Sales shall be assigned to the Party that initiated such
sales. All other overhead costs associated with Trading and Marketing Activities
shall be allocated between the Parties in proportion to the allocation of
Trading and Marketing Realizations pursuant to Section D3 below.
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SYSTEM INTEGRATION AGREEMENT BETWEEN
CAROLINA POWER & LIGHT COMPANY AND FLORIDA POWER CORPORATION
PAGE D-2
- --------------------------------------------------------------------------------
D3 - ALLOCATION OF TRADING AND MARKETING REALIZATIONS
- -----------------------------------------------------
The Agent shall determine the Trading and Marketing Realizations on an
hourly basis. The hourly amounts (adjusted to remove realizations associated
with Long-Term Off-System Sales) shall be allocated to the Parties in proportion
to the amount of Generating Resources or other contract rights that each Party
contributed to the Trading and Marketing Activities during the applicable hours.
Realizations associated with Long-Term Off-System Sales shall be assigned to the
Party that initiated such sales.
EXHIBIT D-1
February 3, 2000
Mrs. Geneva S. Thigpen
Chief Clerk
North Carolina Utilities Commission
Post Office Box 29510
Raleigh, North Carolina 27626-0510
Re: NCUC Docket No. E-2, Sub 760
Dear Mrs. Thigpen:
Enclosed for filing are an original and thirty-two (32) copies of the
Application of CP&L Holdings, Inc. to Engage in a Business Combination
Transaction with Florida Progress Corporation.
Very truly yours,
Len S. Anthony
Deputy General Counsel
LSA/sww
Enclosures
77105
411 Fayetteville Street Mall Tel 919 546-6367 Fax 919 546-3805
<PAGE>
STATE OF NORTH CAROLINA
UTILITIES COMMISSION
RALEIGH
DOCKET NO. E-2, SUB 760
BEFORE THE NORTH CAROLINA UTILITIES COMMISSION
In the Matter of ) APPLICATION OF CP&L
) HOLDINGS, INC. TO
Application of CP&L Holdings, Inc. ) ENGAGE IN A BUSINESS
to Engage in a Business Combination ) COMBINATION TRANSACTION
Transaction with Florida Progress Corporation ) WITH FLORIDA PROGRESS
) CORPORATION
CP&L Holdings, Inc. ("CP&L Holdings") hereby applies to the North
Carolina Utilities Commission ("the Commission") pursuant to N.C.G.S. ss.ss.
62-111 and 62-161, for authorization to engage in a business combination
transaction between CP&L Holdings and Florida Progress Corporation ("FPC") and
in connection with that transaction, authorization to issue common stock without
par value. In support of this Application, CP&L Holdings shows the following:
1. CP&L Holdings is a corporation organized and existing under
the laws of the State of North Carolina. Its principal office is located at 411
Fayetteville Street Mall, Post Office Box 1551, Raleigh, North Carolina
27602-1551. In Docket No. E-2, Sub 753, Carolina Power & Light Company ("CP&L"),
North Carolina Natural Gas Corporation ("NCNG") and Interpath Communications,
Inc. ("Interpath") applied to the Commission for authority to transfer their
ownership to a new holding company. As explained in the Application in that
docket, CP&L has established a North Carolina corporation, CP&L Holdings, Inc.
which currently has a nominal amount of stock outstanding and no present
business or properties of its own. All of the currently outstanding shares of
CP&L Holdings common stock are owned by CP&L. CP&L and CP&L Holdings have
entered into an Agreement and Plan of Share Exchange which provides for the
<PAGE>
exchange of CP&L common stock for CP&L Holdings common stock. Under the terms of
the proposed Plan of Exchange, holders of the common stock of CP&L will exchange
their shares for a like number of CP&L Holdings common stock. Shares of CP&L
common stock will be exchanged automatically for shares of CP&L Holdings common
stock without the necessity of a physical exchange of share certificates and
CP&L Holdings will become the owner of the CP&L common stock formerly
represented by the CP&L common stock certificates. As a result, CP&L will become
a wholly-owned subsidiary of CP&L Holdings. The common stock of NCNG and
Interpath will be conveyed by CP&L to CP&L Holdings as a dividend. As a result,
NCNG and Interpath will also become wholly-owned subsidiaries of CP&L Holdings.
2. FPC is a public utility holding company that is exempt from
registration with the Securities and Exchange Commission pursuant to Section
3(a)(1) of the Public Utility Holding Company Act. The principal public utility
subsidiary of Florida Progress is Florida Power Corporation, which is engaged in
providing wholesale and retail electric service through a service area of
approximately 20,000 square miles that is located primarily in central and
northern Florida. Florida Power Corporation renders electric service to
approximately 1.3 million customers. In 1998, Florida Power Corporation had
operating revenues of approximately $2.6 billion and experienced a peak demand
of approximately 8,000 MW.
3. The names and addresses of the applicant's attorneys who are
authorized to receive notices and communications with respect to this
application are:
William D. Johnson, Senior Vice President and Corporate Secretary
Len S. Anthony, Manager, Regulatory Affairs
Kendal C. Bowman, Associate General Counsel
Carolina Power & Light Company
Post Office Box 1551
Raleigh, North Carolina 27602-1551
Telephone: (919) 546-6367
2
<PAGE>
4. CP&L Holdings and FPC propose to engage in a business
combination in which CP&L Holdings will acquire all of the issued and
outstanding common stock of FPC in exchange for a combination of shares of CP&L
Holdings' common stock and cash ("the Share Exchange"). Under the terms of the
Exchange Agreement, FPC shareholders may elect to receive: $54.00 in cash for
each outstanding share of FPC common stock; or the number of shares of CP&L
Holdings common stock equal to the ratio determined by dividing $54.00 by the
average of the closing sale price per share of CP&L Holdings common stock for
the 20 consecutive trading days ending with the fifth trading day immediately
preceding the closing date (subject to pro ration in the event that FPC
shareholders elect to receive more than 65% of the total consideration for the
exchange in cash or more than 35% in CP&L Holdings common stock); or a
combination of CP&L Holdings common stock and cash. As a result of the share
exchange, FPC will become a direct, wholly-owned, subsidiary of CP&L Holdings.
5. Pursuant to the terms of the Exchange Agreement, upon
consummation of the Share Exchange, CP&L Holdings will have a fourteen (14)
member board of directors to which FPC may nominate four (4) directors, subject
to approval by CP&L Holdings. The CP&L Holdings by-laws provide that the Board
shall be divided into three (3) classes, each as nearly as possible equal in
number to the others, with the classes being elected for staggered three (3)
year terms. (A copy of the Exchange Agreement is attached hereto as Exhibit No.
1).
6. As part of the merger, CP&L Holdings will create CP&L Services,
Inc., a service company to provide certain administrative services to its
electric utility subsidiaries and non-utility subsidiaries. The services
available through the services company are expected to include some or all of
the following: strategic planning; finance; treasury; tax; accounting; legal;
human resources; information systems; investor relations; and public relations.
3
<PAGE>
The centralized provision of administrative services will enable the utilities
to achieve efficiencies and economies. Although it is subject to change, a
corporate organization chart showing the currently expected structure at the
CP&L Holdings system is attached hereto as Exhibit 2.
7. G.S.ss.62-111 provides that all mergers or combinations
affecting a public utility require Commission approval. This statute further
provides that the standard the Commission shall use in determining whether to
approve a proposed merger is whether the merger is "justified by the public
convenience and necessity." G.S.ss.62-161 requires CP&L Holdings to obtain
Commission approval prior to issuing its common stock in conjunction with the
proposed merger.
8. As explained by the Commission in its Order issued August 29,
1988 in Docket No. E-7, Sub 427, the North Carolina Supreme Court and the North
Carolina Utilities Commission have construed G.S. ss. 62-111 as requiring the
Commission to determine whether or not rates and service will be adversely
affected by the proposed transaction. (North Carolina ex rel. Utilities Comm'n.
v. Carolina Coach Company, 269 N.C. 717, 153 S.E.2d 461 (1967)). By Commission
Order issued April 22, 1997, in Docket No. E-7, Sub 596 (the Order approving the
merger of Duke Power Company and PanEnergy) the Commission explained that for
the public convenience and necessity standard to be met, expected benefits must
be at least as great as known and expected costs. Factors to be considered by
the Commission include, but are not limited to, the maintenance of or
improvement in service quality, the extent to which costs can be lowered and
rates can be maintained or reduced, and the continuation of effective state
regulation.
9. More recently, by Order issued December 7, 1999, in Docket No.
G-5, Sub 400 (the Order approving the merger of SCANA Corporation and Public
Service Company of North Carolina, Inc.) the Commission found that G.S. ss.
4
<PAGE>
62-111 does not require that a proposed business combination transaction be
based upon demonstrations of specific cost savings. Cost savings are just one
factor that may be considered in evaluating a request to engage in a business
combination transaction. Other factors include, but are not limited to, such
nonquantifiable benefits as: a larger, more viable and more financially diverse
company with a broader range of assets and increased ability to provide stable
and reliable service; a stronger and more diverse company that is able to
compete regionally; and a corporation with a strong presence in North Carolina
which creates corporate and other taxes payable to the State of North Carolina
and the provision of significant employment opportunities.
10. The Public Utility Holding Company Act conditions CP&L has
agreed to adopt in Docket No. E-2, Sub 753; the regulatory conditions
established in Docket No. E-2, Sub 740 and G-21, Sub 377; the regulatory
conditions CP&L and the Public Staff are drafting in the E-2, Sub 753 docket;
and CP&L's Code of Conduct, ensure that CP&L's, NCNG's and Interpath's rates and
service are not adversely effected by the merger. Thus, these conditions and
commitments satisfy the requirements of G.S. ss. 62-111. In addition, as will be
subsequently explained, the proposed merger will produce the very benefits
identified in the Commission's December 7, 1999 Order in Docket No. G-5, Sub 400
as well as several additional significant benefits.
11. In the December 29, 1999 Foster Electric Report, at page 31
(which is attached as Exhibit 3), it is reported that the Energy Information
Administration ("EIA") has issued a report entitled "The Changing Structure of
the Electric Power Industry, 1999: Mergers and Other Corporate Combinations."
This report finds the driving force behind the rapid consolidation of the
electric industry is utilities attempting to find ways to cut costs and meet the
5
<PAGE>
demands of increasing competition in the electric power industry. The report
finds that since the Energy Policy Act was passed in 1992, 26 mergers involving
investor-owned utilities have been completed and 16 additional mergers announced
before September 1999 are pending approval. If all the pending mergers are
completed within the next year, EIA predicted that by the end of 2000, the ten
largest investor-owned utilities will own about 51% of all investor-owned
utility generating capacity.
12. CP&L is surrounded by electric utilities that are over twice
its size. To the north is Dominion Resources, Inc. To the immediate west of CP&L
are Duke Energy Corporation and American Electric Power Company and to the
southwest are Southern Company and Entergy. The total assets and generating
capacity of these companies are shown in the chart below. All of these companies
enjoy substantial economies of scope and scale that allow them to provide
service to their retail customers at a cost below that achievable by CP&L alone
and provide them with financial strength and capability much greater than that
enjoyed by CP&L.
- --------------------------- ---------------------------- -------------------
COMPANY TOTAL ASSETS (IN $ MILLIONS) SUMMER GENERATING
CAPACITY (MW)
- --------------------------- ---------------------------- -------------------
AEP and CSW 33,227 37,498
- --------------------------- ---------------------------- -------------------
Southern Company 38,225 32,427
- --------------------------- ---------------------------- -------------------
Entergy 22,848 23,418
- --------------------------- ---------------------------- -------------------
Duke Energy Corporation 26,806 17,739
- --------------------------- ---------------------------- -------------------
Dominion Resources and 23,879 12,519
Consolidated Natural Gas
- --------------------------- ---------------------------- -------------------
Carolina Power & Light 9,494 9,963
Company
- --------------------------- ---------------------------- -------------------
13. These events occurring in the electric industry coupled with
the size and strength of CP&L's neighbors demonstrate that in order for CP&L to
continue providing electricity to its customers at rates competitive with its
neighboring utilities and, in all probability, to simply survive, it must grow
to a size sufficient to enjoy these same economies of scope and scale and
6
<PAGE>
financial strength. As explained in paragraph 5 above, FPC is a company very
similar to CP&L in size and generating capability. The merger of CP&L Holdings
and FPC will produce a combined company with utility revenues of $6.7 billion
and 2.7 million electricity and gas customers in a 50,000 square mile retail
service area. Although the combined company will still be smaller than most of
CP&L's neighboring utilities, it will be large enough to compete effectively
with those larger companies.
14. The proposed merger will create a more viable and diverse
company, while preserving a strong corporate presence in North Carolina. It will
enhance CP&L's fuel diversification and operating efficiencies, thus improving
the two companies' ability to meet the challenges of the increasingly
competitive environment in the utility industry. It will also: provide an
infrastructure capable of supporting more efficient utility operations; increase
both companies' financial stability and strength through increased market
capitalization; improve their access to capital markets, increase the geographic
diversity of their respective service territories, reducing exposure to local
changes and economic, competitive and climatic conditions, thus enabling the
resulting combined entity to withstand risk and volatility better than either
CP&L or FPC on a standalone basis; create greater purchasing power for items
such as fuel and transportation services and streamlining of inventories; and
expand the management resources and ability to select leadership from a large
and more diverse management pool.
15. The merger will also assist CP&L and FPC in avoiding rate
increases because the integration of the two electric utilities will enable them
to reduce costs through productivity improvements and increased efficiencies in
the production, transmission, and distribution of electricity. These cost
savings should help mitigate the expense increases being experienced in: the
cost for materials and labor necessary to extend service to the thousands of new
7
<PAGE>
customers moving into both of these companies' territories each year;
environmental costs; and costs to construct the new generation that will be
necessary to meet the ever growing demand for electricity in the southeast.
16. CP&L and FPC estimate the nominal dollar value of synergies
from the merger to be at least $100 million (net of costs to achieve) annually
beginning with the first full year after closing. The merger is expected to
yield several types of presently quantifiable benefits and savings, which are
identified by area below: (1) integration of corporate function; (2) integration
of corporate programs; (3) purchasing economies; (4) fuel procurement; and (5)
business optimization.
17. As with any transaction of this type, there are substantial
costs associated with the creation of these cost reductions and synergies. These
costs include: the amortization of the goodwill associated with CP&L Holdings'
acquisition of FPC; significant information and technology costs and severance
costs; and the significant costs associated with implementing changes in the
processes, procedures and organizations currently in place in the two companies
necessary to achieve the synergies and efficiencies described above.
18. As a result of CP&L Holdings' acquisition of FPC, CP&L
Holdings must become a registered holding company subject to the jurisdiction of
the Securities and Exchange Commission ("SEC"). As explained in CP&L's
Application in Docket No. E-2, Sub 753, pursuant to the Public Utility Holding
Company Act ("PUHCA"), whenever a company acquires an electric or gas utility it
becomes a holding company subject to PUHCA. However, it may qualify for
exemption from the requirements of PUHCA if: (a) the holding company and every
subsidiary that is a public utility from which the holding company derives a
material part of its income are predominately intrastate in character; or (b)
the holding company itself is predominately a public utility whose operations do
8
<PAGE>
not extend beyond the state in which it is organized and contiguous states.
Following the merger, CP&L Holdings will not qualify for either of these
exemptions and will have to become a registered holding company.
19. In conjunction with the merger of SCANA Corporation and
Public Service Company of North Carolina, Inc. and Dominion Resources and
Consolidated Natural Gas Company, both SCANA and Dominion Resources became
registered holding companies. To address the potential conflict between the
SEC's and the Commission's jurisdiction over Dominion Resources and SCANA, and
address other issues involved in the creation of a holding company structure,
the Commission adopted certain holding company and regulatory conditions.
Attached to this Application as Exhibit No. 4 is a list of conditions, similar
to the DRI and SCANA conditions, negotiated by CP&L, the Public Staff and
Attorney General that CP&L is willing to adopt to address any concerns that the
Commission may have regarding the creation of a registered holding company
structure.
20. The acquisition of FPC by CP&L Holdings is justified by the
public convenience and necessity for the reasons explained above. Therefore, the
Commission should approve the proposed business combination transaction.
9
<PAGE>
WHEREFORE, CP&L Holdings requests that the business combination
described herein and the issuance of securities in the manner herein set forth
be authorized and approved by the Commission.
Respectfully submitted this the 3rd day of February, 2000.
CAROLINA POWER & LIGHT COMPANY
By:
------------------------------------
William D. Johnson
Kendal Bowman
Len S. Anthony
Post Office Box 1551/CPB 13A2
Raleigh, North Carolina 27602-1551
Telephone: (919) 546-6367
77105
10
EXHIBIT D-5
FLORIDA POWER CORPORATION
CRYSTAL RIVER UNIT 3
DOCKET NO. 50-302
OPERATING LICENSE NO. DPR-72
- --------------------------------------------------------------------------------
January 31, 2000
3F0100-10
U.S. Nuclear Regulatory Commission
Attn: Samuel J. Collins, Director
Office of Nuclear Reactor Regulation
Mail Stop O-5E7
One White Flint North
11555 Rockville Pike
Rockville, MD 20852-2738
Subject: Application for Indirect Transfer of Control of Operating License
No. DPR-72 for the Crystal River Unit 3 Nuclear Power Plant
Dear Sir:
Pursuant to Section 184 of the Atomic Energy Act, as amended, and 10 CFR 50.80,
Florida Power Corporation (FPC) hereby submits an application seeking Nuclear
Regulatory Commission (NRC) consent to the indirect transfer of control of FPC's
interests in Operating License No. DPR-72 for the Crystal River Unit 3 nuclear
plant (CR-3). The indirect transfer will occur pursuant to the proposed share
exchange transaction between Florida Progress Corporation, FPC's parent company,
and CP&L Holdings, Inc. (Holdings), the new parent company of Carolina Power &
Light Company (CP&L) that is being formed in connection with an internal
reorganization of CP&L.1
The transaction will achieve significant cost savings and efficiencies and
create a stronger, more competitive enterprise, which will be able to compete
more effectively as the deregulation of the electric utility industry proceeds.
FPC will retain the existing ownership interest in CR-3 and remain as the
licensed operator of CR-3 after the share exchange transaction.
In order to achieve the cost savings and efficiencies expected upon consummation
of the transaction, FPC requests expeditious review of this Application by the
NRC. The proposed share exchange transaction will not result in any change in
the licensing basis for the plant, will not require a specific demonstration of
financial qualifications since FPC's status as an electric utility under 10 CFR
- -----------------------------
1 A corporate restructuring establishing Holdings as CP&L's parent company is
expected by the end of the first quarter of 2000, pending regulatory approvals.
On December 29, 1999, the NRC consented to the indirect transfer of control of
CP&L's nuclear operating licenses DPR-23, SNM-2502, DPR-71, DPR-62 and NPF-63,
resulting from the formation of Holdings.
CRYSTAL RIVER ENERGY COMPLEX: 15760 W. POWER LINE STREET o CRYSTAL RIVER,
FLORIDA 34428-6708 o (352) 795-6486
A FLORIDA PROGRESS COMPANY
<PAGE>
U. S. Nuclear Regulatory Commission Page 2 of 2
3F0100-10
50.2 will remain unchanged, and will not require any NRC antitrust review under
Kansas Gas and Electric Co. (Wolf Creek Generating Station, Unit 1), CLI-99-19,
49 NRC __ (June 18, 1999).
The proposed transaction requires approval of other regulatory agencies in
addition to consent from the NRC. The NRC Project Manager for CR-3 will be kept
informed of the progress made by the other regulatory agencies. The share
exchange transaction is expected to be completed by the third quarter of 2000.
Accordingly, it is requested that the NRC consent to the indirect transfer of
control of the CR-3 license by June 1, 2000, to be effective for a period of
twelve months.
Should the NRC receive any petitions to intervene regarding this application for
indirect transfer of control, please contact the appropriate legal department
representative for each respective company. For FPC, please contact Mr. Alex
Glenn, Director, Regulatory Counsel Group (MAC-BT15A), Florida Power
Corporation, P.O. Box 14042, St. Petersburg, FL 33733-4042. Mr. Glenn can also
be reached by telephone at (727) 820-5587. For CP&L, please contact Mr. Steven
Carr, Esq., CP&L Company, P.O. Box 1551, Raleigh, NC 27602-1551. Mr. Carr can
also be reached by telephone at (919) 546-4161.
If you have any questions regarding this submittal, please contact Ms. Sherry
Bernhoft, Director, Nuclear Regulatory Affairs at (352) 563-4566. For CP&L,
please contact Mr. John Caves, Manager, Regulatory Affairs at (919) 546-4579.
Sincerely,
John Paul Cowan
Vice President and Chief Nuclear Officer
JPC/RAG:ff
xc: Document Control Desk
Regional Administrator, Region II
NRC Project Manager
Senior Resident Inspector
Attachments:
A. Application for Indirect Transfer of Control of Operating License
No. DPR-72 for the Crystal River Unit 3 Nuclear Power Plant
B. 1999 Florida Progress Corporation Schedule 13G Filing by Capital
Research Management, Inc.
<PAGE>
FLORIDA POWER CORPORATION
CRYSTAL RIVER UNIT 3
DOCKET NUMBER 50-302/LICENSE NUMBER DPR-72
ATTACHMENT A
APPLICATION FOR INDIRECT TRANSFER OF CONTROL
OF OPERATING LICENSE NO. DPR-72 FOR THE CRYSTAL RIVER
UNIT 3 NUCLEAR POWER PLANT
<PAGE>
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
Florida Power Corporation )
)
Crystal River Unit 3 ) Docket No.50-302
Nuclear Power Plant )
APPLICATION FOR INDIRECT TRANSFER OF CONTROL OF OPERATING LICENSE
NO. DPR-72 FOR THE CRYSTAL RIVER UNIT 3 NUCLEAR POWER PLANT
INTRODUCTION AND BACKGROUND
---------------------------
Florida Power Corporation (FPC) is the holder of Facility Operating
License No. DPR-72 dated December 3, 1976 (Operating License DPR-72). Operating
License DPR-72 authorizes FPC to hold and possess a 91.7806% undivided ownership
interest in the Crystal River Unit 3 (CR-3) nuclear power plant and authorizes
FPC to use and operate CR-3 in accordance with the procedures and limitations
set forth in the operating license.
The purpose of this Application is to request the consent of the
Nuclear Regulatory Commission (NRC) under 10 CFR 50.80 to the indirect transfer
of control of FPC's interest in the CR-3 operating license that will occur under
a proposed share exchange transaction between Florida Progress Corporation
(Progress) and CP&L Holdings, Inc. (Holdings). Holdings is an exempt intrastate
holding company under the Public Utility Holding Company Act of 1935 (PUHCA),
which is being formed by Carolina Power & Light Company (CP&L) as part of CP&L's
internal reorganization. A corporate restructuring establishing Holdings as
CP&L's parent company is expected by the end of the first quarter of 2000,
pending receipt of all required regulatory approvals. On December 29, 1999, the
NRC consented to the indirect transfer of control of CP&L's nuclear operating
licenses DPR-23, SNM-2502, DPR-71, DPR-62 and NPF-63 in connection with the
formation of Holdings. On consummating the share exchange transaction with
<PAGE>
Progress, Holdings will become a registered holding company under PUHCA.
Pursuant to the terms of the transaction, Progress will become a wholly owned
subsidiary of Holdings, which will own all of the outstanding shares of
Progress. A copy of the Joint Proxy Statement and Prospectus will be provided on
a timely basis upon its availability.
CP&L, which holds NRC operating licenses for the Harris, Brunswick and
Robinson nuclear power plants, and a materials license for the Robinson
Independent Spent Fuel Storage Installation, will become a wholly owned
subsidiary of Holdings when the CP&L internal reorganization is completed. CP&L
will remain a wholly owned subsidiary of Holdings after the share exchange
transaction with Progress. FPC, which owns a 91.7806% interest in CR-3, and
which will remain a wholly owned subsidiary of Progress, will also become an
indirect, wholly owned subsidiary of Holdings upon completion of the
transaction. The proposed transaction will result in the indirect transfer of
control of the interest held by FPC in the CR-3 operating license to Holdings.
As a result of the transaction, FPC and CP&L will achieve significant
cost savings and efficiencies that will reduce their operating costs to the
benefit of their customers, shareholders and the communities that they serve.
The transaction will also enhance FPC's financial strength and provide FPC with
additional resources to assure the continued safe operation of CR-3. The
transaction will have no adverse effect on the management, operations, the
licensing basis of CR-3, or the technical or financial qualifications of FPC.
In addition to the NRC's review, the share exchange transaction will
be reviewed by other federal agencies, including the Federal Energy Regulatory
Commission (FERC), the Federal Communications Commission (FCC), the Federal
Trade Commission (FTC), the Securities and Exchange Commission (SEC) and the
U.S. Department of Justice.
<PAGE>
Part I below sets forth the information required by 10 CFR 50.80 with
respect to the proposed transfer. Part II discusses the effective date for the
license transfer.
I. INFORMATION FOR INDIRECT TRANSFER OF CONTROL
--------------------------------------------
A. General Information Concerning FPC
----------------------------------
1. Name and Address
----------------
Florida Power Corporation
One Progress Plaza
St. Petersburg, Florida 33701
2. Description of Business
-----------------------
Following the transaction, FPC will remain a wholly owned subsidiary
of Progress and will become an indirect, wholly owned subsidiary of Holdings.
Its purpose will remain the same as it is now, which is to engage principally in
the generation, transmission, distribution and sale of electric energy in
Florida to residential, commercial and industrial customers for their own use,
and to wholesale customers for resale.
3. Organization and Management
---------------------------
FPC and Progress are, and will remain after the share exchange
transaction, corporations organized and existing under the laws of the State of
Florida. All of FPC's and Progress' directors and principal officers are now and
will be citizens of the United States, at the time of the share exchange
transaction.
The common stock of Progress is currently widely held and publicly
traded.1 Following the proposed transaction, Progress will become a direct,
wholly owned subsidiary of Holdings and FPC will become an indirect, wholly
owned subsidiary of Holdings. FPC and Progress will not be owned, controlled or
- -----------------------------
1 There is only one shareholder with greater than 5% interest in Progress at
this time. Capital Research Management, Inc., a Delaware corporation, which is
an investment advisor registered under Section 203 of the Investment Advisors
Act of 1940, is deemed to be the beneficial owner of approximately 9% of
Progress' outstanding shares as a result of acting as an investment advisor to
various investment companies under Section 8 of the Investment Company Act.
These shares are held for investment purposes and Capital Research disclaims any
intent to exercise control of Progress. A copy of Capital Research's latest
Schedule 13G filing with the SEC regarding this issue is appended as Attachment
B for the Commission's information.
<PAGE>
dominated by an alien, foreign corporation or foreign government. FPC and
Progress are not acting as an agent or representative of any other person in
this request for consent to the indirect transfer of control of the CR-3
license.
B. General Information Concerning Holdings
---------------------------------------
1. Name and Address
----------------
CP&L Holdings, Inc.
411 Fayetteville Street
Raleigh, North Carolina 27601
Attn: Steven Carr
2. Description of Business
-----------------------
Upon consummation of the transaction, Holdings will become a
registered holding company under PUHCA organized and existing under the laws of
the State of North Carolina. Holdings will wholly own, among other subsidiaries,
FPC and CP&L. CP&L will remain a corporation organized and existing under the
laws of the State of North Carolina and its purpose will remain the same as it
is now, which is to engage principally in the generation, transmission,
distribution and sale of electric energy in North Carolina and South Carolina to
residential, commercial and industrial customers for their own use, and to
wholesale customers for resale.
3. Organization and Management
---------------------------
At the time of the transaction, all of the members of the Holdings
Board will be U.S. citizens. Following the proposed transaction, Holdings will
not be owned, controlled or dominated by an alien, foreign corporation or
foreign government. Holdings' stock will be widely held and publicly traded.
<PAGE>
C. Technical Qualifications
------------------------
The technical qualifications of the plant operator, FPC, will not be
adversely affected by the share exchange transaction. The nuclear organization
will continue to have clear and direct lines of responsibility and authority.
While specific individuals may join or leave the nuclear staff, and titles or
responsibilities may change, the technical and administrative abilities will
remain essentially unchanged. The transaction will not require any change in the
licensing basis for CR-3 and will not require any amendments to the CR-3
operating license or technical specifications. Therefore, the technical
qualifications of FPC to carry out its responsibilities under the CR-3 operating
license will not be adversely affected by the proposed transaction.
D. Financial Qualifications
------------------------
After the proposed share exchange transaction, FPC will continue to
generate and distribute electricity and recover the cost of this electricity
through rates authorized by the Florida Public Service Commission and by the
FERC. Therefore, FPC will continue to meet the definition of "electric utility"
set forth in 10 CFR 50.2. Accordingly, its financial qualifications are presumed
by 10 CFR 50.33(f) and no specific demonstration of financial qualifications is
required.
We understand that, in connection with recent mergers of other
licensees, the NRC has expressed interest in being kept informed of subsequent
asset transfers. If this is a consideration in this transaction, FPC is willing
to commit to provide the Director of the Office of Nuclear Reactor Regulation a
copy of any application to transfer (excluding grants of security interests or
liens) from FPC to its proposed parent, or to any other affiliated company,
facilities for the production, transmission or distribution of electric energy
having a depreciated book value exceeding ten percent of FPC's consolidated net
utility plant, as recorded on the books of its account.
<PAGE>
E. Decommissioning Funding
-----------------------
NRC regulations require information showing "reasonable assurance . .
. that funds will be available to decommission the facility." [10 CFR 50.33(k)].
FPC has filed its decommissioning funding reports with the NRC under 10 CFR
50.75(b) and 50.75(f)(1) and is providing financial assurance for
decommissioning its respective ownership interest in CR-3 in accordance with
those reports through an external sinking trust fund in which deposits are made
at least annually. FPC will submit a Decommissioning Financial Assurance Report
by March 31, 2000, pursuant to 10 CFR 50.75(f)(1). After the share exchange
transaction, FPC will remain responsible for the decommissioning liabilities
associated with its ownership interest in CR-3 and will continue to fund its
decommissioning trust for CR-3 in accordance with 10 CFR 50.75.
F. Antitrust Considerations
------------------------
As the Commission recently decided in its review of the license
transfer application of Wolf Creek Generation Station, Unit 1, antitrust reviews
of post-operating license transfer applications are neither required nor
authorized by the Atomic Energy Act. See Kansas Gas and Electric Co. (Wolf Creek
Generating Station, Unit 1), CLI-99-19, 49 NRC __ (June 18, 1999). Accordingly,
no antitrust review is required with respect to the indirect transfer of control
that would result from the proposed transaction. The existing antitrust
conditions in the license will remain in effect.
G. Statement Of Purposes For The Transfer And The Nature Of The
Transaction Necessitating Or Making The License Transfer Desirable
------------------------------------------------------------------
<PAGE>
The purpose of this share exchange transaction is to achieve benefits
for the shareholders and customers of Progress and CP&L and the communities they
serve that would not be achievable if they were to remain separate companies.
The transaction is expected to produce significant cost savings from the
elimination of duplicative activities, improved operating efficiencies and lower
capital costs. As a result, the transaction will enable the companies to respond
more effectively to increased competition in the energy industry.
H. Restricted Data
---------------
This application does not contain any Restricted Data or other
classified defense information, and it is not expected that any will become
involved. However, in the event that such information does become involved, FPC
agrees that it will appropriately safeguard such information and will not permit
any individual to have access to Restricted Data until the Office of Personnel
Management (the successor to the Civil Service Commission) shall have made an
investigation and reported to the NRC on the character, associations, and
loyalty of the individual, and the NRC has determined that permitting such
person to have access to Restricted Data will not endanger the common defense
and security of the United States.
I. No Environmental Impact
-----------------------
The indirect transfer does not involve any change to the nuclear plant
operations or equipment of CR-3 and does not change any environmental impact
previously evaluated in the Final Environmental Statement for CR-3. Accordingly,
this application involves no significant environmental impact.
II. EFFECTIVE DATE
--------------
The proposed share exchange transaction between Progress and Holdings
requires the approval of other federal regulatory authorities in addition to the
NRC, such as the FERC, the FCC, the FTC, the SEC and the U.S. Department of
<PAGE>
Justice. Approval of the shareholders of both companies is also required. Until
all necessary approvals have been obtained, the transaction cannot be
consummated. Progress and Holdings intend to consummate the share exchange
transaction as soon as reasonably possible after all the necessary approvals
have been obtained (targeted by September 1, 2000). Therefore, the NRC is
requested to review this Application as promptly as possible. We request a
schedule that will permit the NRC to act on and provide its final consent to the
proposed indirect transfers of control that would be effectuated by the share
exchange transaction by June 1, 2000, to be effective for a period of twelve
months.
CONCLUSION
For the foregoing reasons, FPC respectfully submits that the proposed
indirect transfer of control of Operating License No. DPR-72 for the CR-3
nuclear plant that will result from the share exchange transaction between
Progress and Holdings is consistent with applicable provisions of law,
regulations and orders issued by the NRC pursuant thereto and that, pursuant to
the criteria set forth in 10 CFR 50.80, the NRC should therefore consent to this
indirect transfer of control.
-------------------------------
John Paul Cowan
Vice President and Chief Nuclear
Officer
STATE OF FLORIDA
COUNTY OF CITRUS
Subscribed and sworn to before me this 31st day of January, 2000, by
John Paul Cowan.
---------------------------
Signature of Notary Public
---------------------------
(Print, type, or stamp Commissioned
Name of Notary Public)
<PAGE>
Personally Produced
Known ____ -OR- Identification ____
<PAGE>
FLORIDA POWER CORPORATION
CRYSTAL RIVER UNIT 3
DOCKET NUMBER 50-302/LICENSE NUMBER DPR-72
ATTACHMENT B
1999 FLORIDA PROGRESS CORPORATION
SCHEDULE 13G FILING
BY CAPITAL RESEARCH MANAGEMENT, INC.
EXHIBIT H
PROPOSED FORM OF FEDERAL REGISTER NOTICE
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-_____)
Filings under the Public Utility Holding Company Act of 1935, as amended ("Act")
March __, 2000
Notice is hereby given that the following filing(s) has/have been made
with the Commission pursuant to provisions of the Act and rules promulgated
thereunder. All interested persons are referred to the application(s) and/or
declaration(s) for complete statements of the proposed transaction(s) summarized
below. The application(s) and/or declaration(s) and any amendments thereto
is/are available for public inspection through the Commission's Office of Public
Reference.
Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in writing by
April __, 2000 to the Secretary, Securities and Exchange Commission, Washington,
D.C. 20549, and serve a copy on the relevant applicant(s) and/or declarant(s) at
the address(es) as specified below. Proof of service (by affidavit or, in case
of an attorney at law, by certificate) should be filed with the request. Any
request for hearing shall identify specifically the issues of fact or law that
are disputed. A person who so requests will be notified of any hearing, if
ordered, and will receive a copy of any notice or order issued in the matter.
After April __, 2000, the application(s) and/or declaration(s), as filed or as
amended, may be granted and/or permitted to become effective.
* * * * * *
CP&L ENERGY, INC., ET AL. (70-[___])
------------------------
CP&L Energy, Inc. ("CP&L Energy"), 411 Fayetteville Street Mall,
Raleigh, North Carolina 27601, and Florida Progress Corporation ("Florida
Progress"), One Progress Plaza, St. Petersburg, Florida 33701, have filed a
joint application-declaration pursuant to Sections 6(a), 7, 9(a)(2), 10, 11(b)
and 13(b) of the Public Utility Holding Company Act of 1935, as amended (the
"Act"), in which they seek Commission approval for a business combination and
for other certain related matters. In the proposed business combination, upon
receipt of all necessary approvals, Florida Progress will become a wholly owned
subsidiary of CP&L Energy. Following the consummation of the proposed
transaction, CP&L Energy will register with the Commission as a holding company
pursuant to Section 5 of the Act.
1
<PAGE>
CP&L Energy, Inc., a North Carolina corporation, is currently a wholly
owned subsidiary of Carolina Power & Light Company ("CP&L"),1 an electric
utility company which provides electric service to approximately 1.2 million
customers in a 30,000 square-mile area of North Carolina and South Carolina that
includes a substantial portion of the coastal plain of North Carolina extending
to the Atlantic Ocean between the Pamlico River and the South Carolina border,
the lower Piedmont section of North Carolina, and an area of northeastern South
Carolina, and a non-contiguous area in and around the City of Asheville. The
estimated total population of the area served is approximately 3.9 million.
CP&L holds all of the outstanding common stock of North Carolina
Natural Gas Corporation ("NCNG"), a gas utility company which CP&L acquired in
July 1999. NCNG provides natural gas service to approximately 115,000
residential, commercial, agricultural, industrial and electric utility customers
in 110 cities and towns in eastern and south central North Carolina and to four
municipal gas distribution systems which serve an additional 46,764 end users.
In addition, NCNG provides propane gas service to more than 11,600 customers and
sells, installs, and services gas appliances.
CP&L also engages in a variety on non-utility businesses through
subsidiaries. Its principal subsidiaries are Monroe Power Company ("Monroe
Power"), an "exempt wholesale generator" within the meaning of Section 32 of the
Act which owns and operates a 160 MW simple-cycle combustion turbine unit
located in Monroe, Georgia; CaroFund, Inc., which participates in affordable
housing projects for low-income individuals and families in North and South
Carolina; Strategic Resource Solutions Corp. ("SRS"), which directly and through
subsidiaries designs, develops, installs, and provides facilities and energy
management software systems and other services for educational, commercial,
industrial and governmental markets nationwide, and designs, engineers, installs
and maintains building automation systems that control heating, ventilation, air
conditioning and lighting; and Interpath Communications, Inc. ("Interpath"),
which is engaged primarily in providing Internet-based services and marketing
fiber optic capacity to telecommunications carriers.
For the year ended December 31, 1999, CP&L's consolidated operating
revenues (pro forma to include the results of operations for NCNG in 1999) were
$3.5 billion, of which $3.14 billion (90.6%) were derived from electric utility
- -----------------------------
1 At this time, CP&L Energy conducts no business operations and has no
material assets. In a separate proceeding (File No. 70-9559), CP&L is seeking
Commission approval for a reorganization whereby CP&L will become a direct,
wholly owned, subsidiary of CP&L Energy, and the current common shareholders of
CP&L will become the shareholders of CP&L Energy. See CP&L Holdings, Inc,
Holding Co. Act Release No. 27108 (December 3, 1999) (notice of filing of
application). The reorganization of CP&L has already been approved by CP&L's
shareholders and is expected to be consummated several months before the
business combination between CP&L Energy and Florida Progress is completed.
2
<PAGE>
operations, $201 million (5.8%) from regulated natural gas operations, and $125
million (3.6%) from diversified non-utility activities. At December 31, 1999,
CP&L had consolidated assets of $9.5 billion, including net utility plant of
$6.8 billion.
Florida Progress's predominant subsidiary, Florida Power Corporation
("Florida Power"), provides electric service to approximately 1.4 million
customers in a 20,000 square-mile area of central and northern Florida and along
the west coast of Florida which includes the cities of St. Petersburg and
Clearwater and the rapidly growing areas around Orlando.
Florida Progress also owns all of the outstanding stock of Progress
Capital Holdings, Inc. ("Progress Capital"), which serves as the holding company
for substantially all of Florida Progress's non-utility operations. Progress
Capital's principal subsidiary is Electric Fuels Corporation ("Electric Fuels"),
which is an energy and transportation company with operations organized into
three business units: energy and related services, inland marine transportation,
and rail services. Electric Fuels supplies substantially all of Florida Power's
coal requirements for its four Crystal River coal-fired units. Most of the coal
delivered by Electric Fuels to Florida Power is purchased from unrelated
producers under several different contracts. Other subsidiaries of Progress
Capital are engaged in the wholesale telecommunications business and the
insurance business.
For the year ended December 31, 1999, Florida Progress reported
consolidated operating revenues of $3.85 billion, of which nearly $2.63 billion
(68%) were derived from electric utility operations and $1.21 billion (32%) were
derived from non-utility activities. As of September 30, 1999, Florida Progress
had total assets of $6.4 billion, including net utility plant of $3.6 billion.
Under the terms of the Amended and Restated Agreement and Plan of
Exchange, dated as of August 22, 1999, as amended as of March 3, 2000 (as so
amended, the "Exchange Agreement"), CP&L Energy has agreed to acquire all of the
issued and outstanding common stock of Florida Progress in exchange for a
combination of shares of CP&L Energy common stock and cash (the "Share
Exchange"). Under the terms of the Exchange Agreement, Florida Progress
shareholders may elect to receive $54.00 in cash for each outstanding share of
Florida Progress common stock or a number of shares of CP&L Energy common stock
equal to the exchange ratio (as described below), subject to proration in the
event that Florida Progress shareholders elect to receive more than 65% of the
total consideration for the exchange in cash or more than 35% in CP&L Energy
common stock.
In the Share Exchange, Florida Progress shareholders may elect to
receive in exchange for each share of Florida Progress common stock that is held
either of:
o $54.00 in cash; or
3
<PAGE>
o a number of shares of CP&L Energy common stock equal to the
exchange ratio, which is designed to provide Florida Progress
shareholders with CP&L Energy common stock having a market value
of $54.00, subject to the limitations described below.
The exchange ratio will be determined by dividing $54.00 by the
average of the closing sale price per share of CP&L Energy common stock as
reported on the New York Stock Exchange Composite Tape on each of the twenty
consecutive trading days ending with the fifth trading day immediately preceding
the closing date (the "Average Closing Price"). However, if the Average Closing
Price is greater than $45.39, the exchange ratio will be fixed at 1.1897, and if
the Average Closing Price is less than $37.13, the exchange ratio will be fixed
at 1.4543. The actual value of stock consideration received for each Florida
Progress share will depend on the market value of CP&L Energy common stock at
the completion of the Share Exchange. Therefore, if the Average Closing Price is
less than $37.13, then each share of Florida Progress common stock exchanged for
stock consideration will be valued in the Share Exchange at less than $54.00,
and if the Average Closing Price is more than $45.39, then each share of Florida
Progress common stock exchanged for stock consideration will be valued in the
Share Exchange at more than $54.00.
The Exchange Agreement also provides that Florida Progress
shareholders will be entitled to receive one contingent value obligation ("CVO")
for each share of Florida Progress common stock. Each CVO will represent the
assignable and transferable right to receive a pro rata portion of certain
contingent payments that are based upon the net after-tax cash flow (including
federal income tax credits) to CP&L Energy generated by four synthetic fuels
plants (referred to as the "EARTHCO" plants) that were purchased by Florida
Progress in October 1999. The CVOs are intended to provide Florida Progress
shareholders with the potential for receiving additional cash consideration in
the Share Exchange linked specifically to the future performance of the EARTHCO
plants.
Initially, CP&L Energy will finance the cash portion of the Share
Exchange consideration, which is estimated not to exceed $3.5 billion, through
unsecured bank borrowings or unsecured borrowings from other institutional
lenders having maturities of up to 3 years. The Share Exchange is not designed
to qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended, and will be accounted for under the purchase
method of accounting.
The applicants state that the electric utility facilities of CP&L and
Florida Power will be interconnected via a 50 MW firm south to north
transmission path (the "Contract Path") over the Southern Company and Duke Power
transmission systems which will extend from the Southern Company /Florida
Interface to the Duke Power/CP&L eastern control area interface. The Contract
Path will be reserved for an initial one-year period and will be subject to the
right to extend for additional one-year periods. CP&L and Florida Power will
enter into a System Integration Agreement ("Integration Agreement") pursuant to
which they will jointly plan all future generation facilities, coordinate the
dispatch of their respective power plants, and centralize fuel supply and plant
maintenance programs, among other things. Other corporate support functions of
4
<PAGE>
the two companies will be centralized in CP&L Services, a subsidiary service
company to be organized by CP&L Energy prior to the closing of the Share
Exchange.
CP&L Services will provide CP&L, NCNG and other companies in the CP&L
Energy system, and, after the Share Exchange, Florida Power and other companies
in the Florida Progress system, with various administrative, management and
corporate support services. CP&L Services will enter into Service Agreements
with each of its associate public-utility companies and each of its associate
non-utility companies. CP&L Energy requests that the Commission find, pursuant
to Rule 88(b), that CP&L Services' organization and the conduct of its business
meet the requirements of Section 13(b) of the Act with respect to providing
reasonable assurance of efficient and economical performance of services for the
benefit of its associate companies, at cost, fairly and equitably allocated
among them.
CP&L Services will be staffed by employees of CP&L and Florida
Progress and their respective subsidiaries who will be transferred over time to
CP&L Services. The Service Agreements provide that CP&L Services may provide its
associate companies with certain administrative and corporate support services,
such as strategic planning, treasury, tax, accounting, legal, human resources,
information systems, investor relations and public relations. For any service
provided, CP&L Services will be reimbursed for its cost of providing the
service, determined in accordance with Rules 90 and 91. To the extent possible,
CP&L Services will identify and assign all of its direct costs incurred in
providing any service to a client company, including labor overheads (e.g.,
payroll taxes, employee benefits, etc.). Other costs that cannot be identified
to a particular client company, or which benefit all clients, will be allocated
to all client companies in accordance with certain proposed methods of
allocation.
CP&L, Florida Power and NCNG may also provide services, upon request,
to CP&L Services or directly to each other utilizing personnel who will not be
transferred to CP&L Services and other resources and capabilities developed in
the conduct of their public utility operations.
The Share Exchange has been approved by the boards of directors at
CP&L, CP&L Energy and Florida Progress and will be submitted for approval to the
shareholders of Florida Progress and CP&L Energy at special meetings called
specifically for such purpose. Various aspects of the proposed transaction have
been or will be submitted for review and/or approval by the Federal Energy
Regulatory Commission, the North Carolina Utilities Commission, the Nuclear
Regulatory Commission, and the Federal Communications Commission. Moreover, the
combination cannot proceed until CP&L and Florida Progress submit the required
information to the Antitrust Division of the Department of Justice and the
Federal Trade Commission and the specified waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired or
been terminated.
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